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ELEMENTARY ECONOMICS 



WITH SPECIAL REFERENCE TO SOCIAL 

AND BUSINESS CONDITIONS IN 

THE UNITED STATES 



BY 

CHARLES MANFRED THOMPSON, Ph.D. 

ASSOCIATE PROFESSOR OF ECONOMICS 
, UNIVERSITY OF ILLINOIS 



BENJ. H. SANBORN & CO. 

CHICAGO NEW YORK BOSTON 

1919 



^■^f 



Copyright, 1919, 
By BENJ. H. SANBORN & CO. 



JUNdl 1919 



(g)CI.A515042 



-H^. I 



TO THE GREAT ARMY OF HIGH SCHOOL PUPILS 

WHO ENTER INDUSTRY EVERY YEAR 

THIS BOOK IS RESPECTFULLY 

DEDICATED 



PREFACE 

Recent events have brought the people of the United States 
face to face with numerous new economic problems, many of 
which are likely to remain unsolved for years to come ; besides, 
they have complicated to a marked degree those old problems 
which were pressing Tor solution at the outbreak of the Great 
War. In consequence, our leaders are becoming more and 
more convinced that increased attention should be given in our 
secondary schools to a serious consideration of the fundamental 
principles on which these problems rest. 

Such a conviction is a new one in many quarters, for hitherto 
the no tion_has very gener ally prevailed, especially among uni- 
versi ty teachers, that no formal study of the Principles of 
Economics should be undertaken before the sophomore year in 
college. Obviously such a notion carries the implication, un- 
conscious perhaps, that the fundamentals of Economics, even in 
their simplest forms, should be withheld from the great mass 
of young men and women engaged in industry, and restricted 
to the select few who are able by one means or another to be- 
come college students. Such a notion not only carries vicious 
implication, but it also is ill founded ; for hundreds of high 
schools the country over prove by experience that their pupils are 
fully capable of grasping the elements of economic science when 
presented concretely and in a way to show their relationship to 
practical affairs. 

The public high school is now the "finishing school" of the 
typical leader of American life, and it is likely to continue to 
perform that function for another generation at least*; and just 
so long as this condition prevails our high schools cannot, if they 



VI PREFACE 

would, escape the responsibility of presenting squarely and as 
fully as possible the elementary principles that govern our every- 
day business actions. 

Since the great bulk of the leaders of to-morrow can have no 
other academic training in economic principles than that gained 
in the public high school, it is highly essential that the text- 
book placed in their hands should be S Qinethinp; more than a n 
introduction to a college course to be pursued two or three years 
hence. It should, with due regard for the capacities of high 
school pupils, endeavor to introduce its readers to the princi- 
ples that u nderlie business..a7idi_dgt'P-^^T^'"P- in large measure the 
practices of the business world. 

' ~ In preparing this text I have had four ideals in mind : to 
^V choose for discussion only those topics which are fundamentally 
important ; to push the discussion of laws and i:)rinciples to a 
point where every serious-minded high school pupil would feel 
a real mental challenge ; to illustrate every law and principle 
by references to historical events and to everyday experiences, 
and by the use of gra]>hi(' material ; and finally, to show the 
relation of each taw and principle to the industrial activities 
in which practically every high school boy and many of our 
girls must engage. 

In keeping the viewpoint of the high school I have had the 
assistance of teachers in secondary schools of various types in 
all sections of the country ; and for their kind and disinterested 
cooperation I take pleasure in expressing my sincere appre- 
ciation. I am under special obligation to one of my col- 
leagues, Dr. M. H. Hunter, who has read and criticized the 
entire manuscript, and rendered invaluable aid in preparing 
the Exercises and Problems that accompany each chapter. 

Charles Manfred Thompson 

Urbana, Illinois 
June 1, 1919 



TABLE OF CONTENTS 

PART I. INTRODUCTION — ECONOMICS AS A SOCIAL 
SCIENCE 

CHAPTER PAGE 

I. The Social Viewpoint 

1. The Social Sciences ....... 3 

2. The Individual and Society ...... 6 

3. Wealth and Welfare 9 

Exercises and Problems ...... 12 

Supplementary Reading .;.... 15 

II. Nature and Content of Economics 

4. Nature of Economics ....... 16 

5. Divisions of Economics .... o.. 19 

Exercises and Problems ....... 24 

Supplementary-Reading ...... 26 



PART II. CONSUMPTION OF ECONOMIC GOODS 

III. Nature of Consumption 

6. Motives behind Economic Activity . . . .29 

7. Nature of Demand 32 

8. Elasticity of Demand . . . . ' . . .34 

Exercises and Problems ...... 38 

Supplementary Reading 39 

IV. Laws of Consumption 

9. Human Wants Are Unlimited ..... 40 

10. The Law of Diminishing Utility ..... 44 

11. The Law of Marginal Utility 46 

Exercises and Problems ...... 52 

Supplementary Reading ...... 53 



Vlll 



TABLE OF CONTENTS 



CHAPTER ' 

V. Demand, Supply, and Price 

12. Relation of Demand and Supply to Price 

13. Determination of Market Price . 

14. The Competitive Market Price . 
Exercises and Problems 
Supplementary Reading 



VI. Some Practical Aspects of Consumption 

15. Harmful Consumption 

16. Unwise Consumption . 

17. Conservation and Thrift 

18. Substitution 
Exercises and Problems 
Supplementary Reading 



54 
56 
69 
64 
66 



67 
69 

72 
78 
79 
81 



PART III. PROBLEMS OF PRODUCTION 



VII. Organization of Industry 

19. Historical Background . 

20. The Single Enterpriser and the Partner 

21. The Corporate Form of Organization 
Exercises and Problems 
Supplementary Reading 



ship 



85 
88 
90 
95 
96 



VIII. Division of Labor and Large-Scale Production 

22. The Factors of Production . 

23. Division of Labor 

24. Territorial Division of Labor 

25. Large-Scale Production 
Exercises and Problems . * 
Supplementary Reading 



IX. Land (Natural Resources) 

26. Land as a Productive Factor 

27. Natural Resources of the United States 

28. The Law of Diminishing Returns 
Exercises and Problems 
Supplementary Reading 



97 
100 
106 
108 
111 
113 



114 
118 
122 
128 
129 



TABLE OF CONTENTS 



IX 



CHAPTER 

X. Capital as 



A Factor in Production 

29. Source of Capital 

30. Nature of Capitalistic Production 

31. Different Kinds of Capital 
Exercises and Problems 
Supplementary Reading 



130 
132 
134 
138 
140 



XI. Competition versus Monopoly 
.32. Impetus of Competition 

33. The Law of Monopoly Price 

34. Limitations on Monopolists 
Exercises and Problems 
Supplementary Reading 



141 
145 
147 
151 
153 



XII. Transportation 

35. Stages in the Development of Transportation in the 

United States 154 

36. Railroad Competition ...... 158 

37. Rate-Maldng . 161 

38. Government Regulation of Railroads . . . 162 
Exercises and Problems ...... 166 

Supplementary Reading . . . . . . 168 



XIII. Marketing the Products of Industry 

39. Separation of Producers and Consumers 

40. Indirect Methods of Marketing 

41. More Direct Methods of Marketing . 
Exercises and Problems 
Supplementary Reading 



169 
170 
176 
179 

182 



XIV. Government and Production 

42. Patents, Copyrights, and Trade-marks 

43. Regulation of Industrial Monopolies 

44. Regulation of Public Utilities 

45. Fixing Prices 
Exercises and Problems 
Supplementary Reading 



183 
186 
190 
192 
193 
195 



TABLE OF CONTENTS 



PART IV 

CHAPTER 

XV. 



THE EXCHANGE OF ECONOMIC GOODS 



Use of Money in Making Exchanges 

46. Characteristics of a Good Money .... 199 

47. Uses of Money 202 

48. Kinds of Government Money ..... 205 

Exercises and Problems ...... 210 

Supplementary Reading ...... 212 



XVI. Monetary Laws Illustrated From the History of 
THE United States 

49. Some Important Monetary Laws .... 213 

50. Monetary History of the United States . . .216 
Exercises and Problems ...... 224 

Supplementary Reading ...... 226 

XVII. Banking and Its History 

51. Development of the Principle of Banking . . 227 

52. Different Kinds of Banks 229 

53. A Bank Statement 231 

54. Banking in the United States 233 

Exercises and Problems ...... 238 

Supplementary Reading ...... 240 

XVIII. Domestic and Foreign Commerce 

55. Nature and Volume of the Trade of the United 

States 241 

56. Paying Trade Debts 243 

57. The Balance of Trade 247 

Exercises and Problems . . . • . . . 253 

Supplementary Reading ...... 255 

XIX. The Tariff in the United States 

58. Historical Sketch 258 

59. Basis of Free Trade . .262 

60. Economic Arguments for Protection . . . 263 

61. Protection and Nationalism ..... 264 

Exercises and Problems ...... 265 

Supplementary Reading ...... 268 



TABLE OF CONTENTS 



XI 



CHAPTER 

XX. Fluctuations of the Price Level 

62. Effects of Fluctuating Prices . 

63. Measurements of Price Fluctuations 

64. Price Level and Industry 
Exercises and Problems . 
Supplementary Reading . 



269 

272 
274 
277 
279 



PART V. DISTRIBUTION OF THE SOCIAL INCOME 

XXI. Distribution of Wealth in the United States 

65. Differences in Wealth and Income . 

66. Some Social Problems Arising from Distribution 

67. Proposed Solutions ...... 

Exercises and Problems ..... 

Supplementary Reading ..... 



XXII. Return to Labor (Wages) 

68. Noncompeting Groups of Workers 

69. Efficiency and Wages 

70. Methods of Wage Payment 
Exercises and Problems . 
Supplementary Reading . 

XXIII. The Labor Problem 

71. Rise of Organized Labor 

72. Aims and Methods of Organized Labor 

73. Methods of Settling Labor Disputes 

74. Labor Legislation .... 

75. Foreign Immigration 
Exercises and Problems . 
Supplementary Reading . 

XXIV. Return to Land (Rent) 

76. Nature and Source of Agricultural Rent 

77. Urban Rents ..... 

78. Economic Rent and Price 
Exercises and Problems . 
Supplementary Reading ■ . 



283 
287 
291 
292 
294 



295 
303 
303 
30S 
310 



311 
313 
319 
321 
323 
326 
329 



330 
334 
338 
341 
344 



Xll 



TABLE OF CONTENTS 



CHAPTER PAGE 

XXV. Return to Capital (Interest) 

79. Interest Peculiar to Modern Industry . . . 345 

80. Why Interest is Paid and How Much . . .346 

81. Variations in the Interest Rate .... 351 

Exercises and Problems ...... 353 

Supplementary Reading 355 

XXVI. Return to the Business Man (Competitive Profits) 

82. Place of the Business Man in Industry . . . 356 

83. The Nature and Source of Profits . . . .359 

84. Cooperation and Profits ..... 363 

Exercises and Problems ...... 366 

Supplementary Reading 368 

XXVII. Socialism 

85. Nature and Purposes of Socialism .... 369 

86. Criticisms of the Socialistic Program . . . 374 

87. Some Substitutions for Socialism .... 377 

Exercises and Problems ...... 379 

Supplementary Reading 381 

XXVIII. Social Insurance 

88. The Risks of Industry 382 

89. Kinds of Social Insurance : Europe . . . 386 

90. Progress and Outlook of Social Insurance in the 

United States 389 

Exercises and Problems ...... 393 

Supplementary Reading ...... 396 

XXIX. The Share of the Government in Distribution 
(Taxation) 

91. Government Revenues and Government Expendi- 

tures ......... 397 

92. Bases of Taxation 401 

93. Kinds of Taxes 404 

Exercises and Problems ...... 407 

Supplementary Reading ...... 410 



Classified Course of Reading 
Index 



411 
415 



PART I 

INTRODUCTION 
ECONOMICS AS A SOCIAL SCIENCE 



ELEMENTARY ECONOMICS 

CHAPTER I 
THE SOCIAL VIEWPOINT 

1. The Social Sciences 

Nature and content of the social sciences. — The subjects 
of study that deal with the various phases of human activity, 
as expressed in social groups, are known as the social sciences. 
Those which we may profitably notice in this connection are 
history, ethics, government, law, sociology, and economics. 

History brings to us from the past the record of social achieve- 
ment, which, if properly interpreted, serves as a guide for 
present action and assists to forecast the future. History 
is not merely, as an eminent English historian once wrote, past 
politics ; it is a great deal more. It is, so to speak, the founda- 
tion on which all the other social sciences are built, since a 
complete understanding of any one of them depends on a 
correct knowledge of past events and past developments. 

Ethics is concerned with the human d utie s of mankind ; with 
the application of the golden rule to human relations. Every 
day we hear professional men speak of the ethics of their respec- 
tive professions. A physician, for example, is guided in his 
professional acts by an elaborate code of medical ethics. Like- 
wise the lawyer, the surgeon, the dentist, and the teacher, each 
has the ethical standards of his group to follow and to maintain. 

A third social science is government, or political science, known 
in the high school as civics. This science deals with the govern- 

3 



4 ELEMENTARY ECONOMICS 

merit of social groups as expressed in constitutions and in the 
administration of laws, and with numerous other social aspects, 
as political conventions, primaries, and elections. Closely 
akin to political science is law, which concerns itself primarily 
with laying down definite rules to govern individuals in their 
relations with each other and with the state. 

Another social science is sociology, which, in its narrow 
sense, deals with tho distinctively social relations among in- 
dividuals. Consequently, the chief concern of sociologists is 
with the social welfare of the people. To that end they en- 
gage not only in a study of the causes that produce inequalities, 
but also in an attempt to better social conditions. Theirs is 
a very practical work which leads them into the homes, as well as 
into the social centers now to be found in all large cities. It 
is well to notice in passing, however, that some authorities use 
the term " sociology " in a broader sense to include all the social 
sciences. 

Still another social science is economics. Unlike those al- 
ready mentioned, this science deals largely with the material 
aspects of life. It tries in a scientific spirit to explain the activi- 
ties of inankind in securing a living ; to study man as a ivealth- 
getter and a. wealth-user ; to account for the motives and forces 
that constantly appear in the business relations of the world. 
Because of the materialistic viewpoint which economics must 
necessarily take, many writers and teachers consider it to be a 
mean science, " dismal," selfish, and even soi'did. They 
forget, however, that the average man, irrespective of his 
occupation or station in life, must produce goods as well as con- 
sume them ; that he cannot, if he would, avoid intimate business 
contact with his fellow men and with his surroundings ; and 
that his opportunity to enjoy the higher things of life must 
follow aft(M-, and wait on, the satisfaction of his more material- 
istic needs. 



THE SOCIAL VIEWPOINT 5 

Close interrelation of the social sciences. — We have spoken 
of the social sciences as if they were independent and distinct 
one from the other. Such, however, is not the case, for they are 
merely different aspects of the same science, each regarding 
society from its own particular viewpoint. Yet, since the 
human mind cannot grasp the social field as a unit, it has been 
found desirable to treat them as distinct sciences. In other 
words, we deal with the various social sciences as independent 
subjects of study for the sake of convenience and a clearer 
understanding. Consequently, in our colleges and universities, 
where ample opportunity is given for research and specialization, 
they have been developed independently under the direction 
and guidance of highly trained specialists. We must remember, 
however, that in spite of this development the study of society 
and social relationships is in itself a complete and single 
science. 

Numerous examples of this close relationship are to be found 
on every hand. Foreign immigration, to illustrate, commands 
the attention of the historian, the political scientist, the 
sociologist, and the economist. The historian accounts for 
the events and developments that have caused millions of men, 
women, and children to migrate from their old homes in Europe 
to America. The political scientist is chiefly concerned with 
the immigrant's knowledge of the forms and purposes of govern- 
ment, with his attitude toward American democracy, and with 
his influence on American politics. The sociologist studies the 
more distinctly social questions connected with immigration, 
such as housing conditions, standards of living, morals, educa- 
tion, and entertainment. Lastly, the economist approaches 
the subject from the standpoint of industry, concerning himself 
with the effect of immigration on such things as wages, pro- 
duction of wealth, and foreign trade. Each specializes on a 
small portion of the subject — too often as if it were the whole 



6 ELEMENTARY ECONOMICS 

subject — but it requires the combined labors of all to produce 
a complete and accurate account. 

Some subjects, such as the Constitution of the United States, 
or negro slavery, for example, belong so exclusively to one or 
another social science as to make it appear that treatment under 
any other one is impossible. Obviously, the political scientist 
has the chief interest in the former, while the historian claims the 
latter. Nevertheless the economist must not neglect either. 
Without a proper understanding of the Constitution he could 
not account clearly for the various economic developments 
in such fields as labor legislation, interstate commerce, the 
protective tariff, money and banking; and no description of 
negro slavery can ever be complete which fails to take in 
consideration the economic environment in which it developed, 
its profitableness and unprofitableness, or its effect on the free 
labor with which it competed. 

2. The Individual and Society 

The individual viewpoint of industry. — The normal in- 
dividual very naturally regards all industry from his own narrow 
point of view. He is inclined to feel that his business is the hub 
of industrial activity, that it is essential to the welfare of society, 
and that it even deserves encouragement at the hands of the 
government ; and this feeling he often has regardless of the 
best interests of society. A short wheat crop with high prices 
may bring joy to the wheat farmer, though it may bring distress 
to multitudes of consumers. Likewise, the glaziers in the neigh- 
borhood of numerous greenhouses may welcome a severe hail- 
storm as a blessing, when obviously it is detrimental to society 
as a whole. Even those whose special duty it is to regard in- 
dustry from the social point of view often fall into the same error. 
Every winter metropolitan newspapers view heavy falls of snow 
as godsends to the unemployed men of the cities, who, as a 



THE SOCIAL VIEWPOINT 7 

result, are able to find work cleaning streets and sidewalks. 
Such erroneous notions arise from the practices of modern 
society, in which each individual produces not for his own 
direct consumption, but for the markets. It would be different 
if each supplied his own wants directly by his own labor. 
The wheat farmer would view a short crop with alarm ; the 
glazier would see no blessing in a hailstorm that compelled 
him to repair his own greenhouse ; nor would the residents of 
any city regard a heavy snowfall as a godsend if each man were 
compelled to shovel the snow from his own doorway. 

Social viewpoint of industry. — While it must be admitted 
that the individualistic, or selfish, viewpoint of industry is the 
force that drives men to seek improved methods, we must not 
lose sight of the fact that the welfare of society is more important 
than that of any individual or group of individuals ; and that no 
individual claim for preferment can stand as an obstacle in the 
way of social betterment. This broader viewpoint, the view- 
point of society, has made steady headway during the past 
generation. Not many years ago industrial leaders took the 
ground that it was none of society's affair how they conducted 
their own business. Now they think and act differently — they 
recognize their responsibilities to society. Recently one of 
America's best known captains of industry made the public 
statement that in the operation of his business and in the use 
of his wealth, he considered, not alone his own desires and needs, 
but also the desires and needs of society. The same spirit has 
permeated other industrial groups. Professional men, farmers, 
small business men, labor organizations, and even unorganized 
labor are catching the spirit that, while American democracy 
stands back of every individual in his efforts to be successful 
and happy, his success and happiness must not be acquired at 
the expense of the success and happiness of society at large. 

Because of these different viewpoints the economist and the 



8 ELEMENTARY ECONOMICS 

business man are inclined to disagree, and too often they have 
a mutual disregard for each other's opinions. The economist is 
likely to regard the business man as selfish and self-centered, 
while the business man looks on the economist as a dreamer, 
and on his plans as visionary and impracticable. Both are 
right and both are wrong. The business man as such, if he is to 
succeed in a large measure, must conduct his business as if it 
were all-important, while the economist, on his part, must 
include society as a whole in his field of investigation, and 
formulate principles regardless of individual desires and pur- 
poses. 

Industry and free public education. — The interest of society 
in private industry is one of the chief reasons for the establish- 
ment and maintenance of free public education. Clearly, 
children as well as their parents have the correct notion that 
school attendance increases the chances for higher individual 
incomes in after life. Almost all college students, and, it is 
safe to say, a majority of high school pupils, particularly boys, 
frankly admit, when questioned on the subject, that they 
attend school primarily to prepare themselves for better-paying 
places in the industrial world than they otherwise could expect 
to get. They are encouraged to take this view by educators 
and teachers who dwell on the fact that each day a boy spends 
in high school or college adds ten dollars or more to his income 
in after life. The desire to increase one's earning power is 
laudable enough, but may we not properly ask : Can the 
expenditure of pubhc money be justified, from an economic 
point of view, on the ground that it will assist individuals to 
increase their own incomes? The answer involves the two 
aspects of industry — individual and social. Society appeals 
directly to the narrow motives of the individual, we may say — 
not improperly — to his selfishness. It gives him, at public 
expense, the opportunity to prepare himself to earn more than 



THE SOCIAL VIEWPOINT ^ 9 

would otherwise be possible, knowing full well that in the long 
run he will normally return to society, through increased 
production, not only the cost of his training and education, but 
also something in addition. 

An efficient industrial society. — In spending enormous 
sums on public education, society has in mind an improved 
citizenship from the standpoint not only of culture and govern- 
ment, but also of industrial efficiency. At one time education 
stood almost exclusively for a higher appreciation of literature 
and art. Later it stressed the need of a better and a clearer 
understanding of the working of the government. Now society 
demands that the possessor of an education, in addition to being 
cultured and versed in the science of government, shall be 
industrially efficient. To that end commercial courses, commer- 
cial high schools, technical schools, and technical colleges in 
the universities have been established. Also the courses in the 
so-called literary schools and colleges have been changed to meet 
the new demand. There is nothing alarming in this educational 
tendency. It merely means that the next generation will value 
not less highly the cultural development and the stir of civic 
duty that comes from study in schools and colleges, but rather 
that it will also appreciate the need of an increased industrial 
efficiency and prepare itself through education and training to 
meet that need. 

3. Wealth and Welfare 

Free goods and economic goods. — The word '' good " has 
two slightly different meanings. When a business man speaks 
of goods he means commodities, such as hay, wheat, clothing, 
and furniture. The student of economics gives the same word a 
broader meaning. He includes not only commodities, but also 
personal services rendered by domestic servants and others. 
No serious confusion, however, is likely to arise from this 



10 ELEMENTARY ECONOMICS 

difference of meaning, for the laws and principles applying to 
commodities very generally apply to personal services. 

It is much more important to distinguish between free goods 
and economic goods. A free good is a gift of nature, supplied 
without labor and without limit. Economic goods, on the 
other hand, are characterized by their scarcity as compared to 
the demand for them. The best examples of free goods are air 
and sunlight, though in exceptional cases these may become 
economic goods. Water in a brook or spring may also be 
considered as free, despite the fact that some effort is always 
necessary to secure and utilize it. Free goods are extremely 
important in the life of human beings, yet the chief attention of 
students of economics must be directed toward economic goods. 

Nature of wealth. — In discussing wealth two important 
facts must be kept constantly in mind. First, the wealth of 
an individual may or may not be wealth in a social sense. 
Second, an increase in wealth may, owing to increased prices, 
be accompanied by a decrease in the world's supply of commod- 
ities. On first thought most of us would say that the wealth of 
any society is composed of the total wealth of its individual 
members. Such, however, is not the case. The execution of a 
real estate mortgage, while it places in the hands of the o^vner 
evidence of wealth from which he may derive an income, has 
not added a single item to the wealth of society. It shows 
merely that one party has temporarily given up his command 
over a portion of social wealth, which in most cases of this kind is 
money. Some forms of individual wealth may even represent a 
positive- decrease in social wealth. Such are government bonds 
sold to carry on war. Clearly, then, it is a mistake to attempt 
to estimate the total wealth of any large social group by adding 
the wealth of its individual members. 

Nor does an increase in social wealth necessarily indicate 
that there has been an increase in the number or amount of com- 



THE SOCIAL VIEWPOINT 11 

modities possessed by this same society. Here again we are 
likely to be misled by our first thoughts on the subject. An 
over-abundance of wheat, for example, though it should make 
bread cheap and plentiful, might well cause the total value 
of the wheat to be less than would be the case if but one-half 
or one-third of the amount had been raised. Conversely, a 
shortage in wheat might well raise the value of the total crop, 
alsqlitlie value of the land on which it is produced, far above the 
values based on normal yields. In any case, there is no exact 
relation between the wealth of a social group and its stock of 
commocnties ; and for that reason we should not be hasty in 
concluding that a wealthy /community or country is necessarily 
prosperous. 

Wealth and natural resources. — Obviously, the foregoing 
discussion leads to the conclusion that wealth and welfare are not 
necessarily identical terms. Any social group that is com- 
pelled, for example, to consume great quantities of coal for 
heating purposes must of necessity be wealthier than a similar 
group more|favored by nature, if the two groups are to share 
equally in the satisfaction of wants. A New England mechanic 
must necessarily be wealthier than his Florida brother if during 
the year the two are to have exactly the same wants supplied, 
for he must consume wealth in the form! of fuel, warm clothing, 
and heat-producing foods, to enjoy exactly the same comforts 
which nature in warm climates furnishes freely and without 
limit. The same principle is involved in comparisons of the 
North and the South just prior to the beginning of the Civil 
War. The value of the northern,' hay crop occupies a large 
place in these comparisons, but scarcely ever does one find any 
mention of the value of the year-round grazing lands of the 
South. The mere fact that the North cured more than a hun- 
dred million dollars' worth of hay each year is ample evidence 
of , the presence of wealth in that section, but it does not prove 



12 ELEMENTARY ECONOMICS 

that its welfare was increased over what it would have been 
had the climate permitted the stock to graze in the fields during 
the winter months. An abundance of natural gifts ordinarily 
produces^prosperity and a relatively high degree.'bf human wel- 
fare, which may or may not be accompanied by great wealth, 
either social or individual. Consequently, in judging the well-^^ 
being of a large social group, such as a state or a section of the 
United States, a mere knowledge of the wealth of that section 
or state is' not sufficient. We must first know something of 
the gifts of nature which it enjoys. 

Wealth and its distribution. — We must also remember that 
a large social group, as such, may be relatively wealthy and even 
enjoy a high degree of total welfare and still have among its 
members many who suffer fron|a lack of the common necessaries 
of life. This situation we often meet in large cities, where along- 
side lavish displays of wealth we find multitudes of under- 
nourfshed creatures dragging out a miserable existence in dirty, 
crowded tenement houses. On the one extreme is abundance ; 
on the other, poverty and want.] This inequality offers the 
hardest social problem we are called on to solve. It engages 
the attention of serious thinking people everywhere, for it 
seems to contradict the prevalent notion that progress in the 
industrial arts has been accompanied by an increase in the 
welfare of all classes of society.! 

EXERCISES AND PROBLEMS 
A 

1. Why should history be called a social science? 

2. What is the essential difference between poHtical science and 
law? 

3. What is meant by the expression "legal ethics"? 

4. Under which social science should a study of charity be made? 
Why? 



THE SOCIAL VIEWPOINT 13 

5. What is the interest of the historian, the poUtieal scientist, 
the sociologist, and the economist in the following social subjects : 

a. Farm tenancy? 

b. Presidential elections? 

c. Corruption in city politics ? 

d. Expansion of foreign commerce? 

e. The Great War? 

/. Railroad development? 
g. The post of&ce? 

6. What is meant by the expression "individual viewpoint"? 

7. How can the expenditure of public money for river or harbor 
improvements be justified ? 

■ 8. Why does society bear a portion of the expense of public educa- 
tion? 

9. How does education increase industrial efficiency? 

10. Can an individual be industrially efficient and at the same 
time be cultured? Explain. 

11. Just how, if at all, does training for industrial efficiency lessen 
the desire and ability of an individual to be a good citizen ? 

12. Define "wealth." 

13. Explain the effect of prices on wealth. 

* 14. What is the difference between wealth and welfare? 

15. Why, since nature is so bounteous in the tropics, are the people 
of Central America relatively poor ? 

16. Why are the people of the Arctic regions relatively poor ? 



1. Mention three or four public improvements in your community. 
What interest do they hold for you as a student of : 

a. History? c. Sociology? 

h. Political science (civics)? d. Economics? 

2. Do students ever have individual viewpoints which society 
would not sanction, as to methods of : 

a. Earning money? c. Spending leisure time ? 

b. Securing academic credit? d. Using school equipment? 

3. Enumerate the motives that cause young people to attend high 
school or college. 

a. Comment on these motives. 

b. Are any of them selfish? 



14 ELEMENTARY ECONOMICS 

c. Are any of them entirely unselfish? 

d. Would society wholly condemn any of them? 

4. Air and sunlight are free goods. Name others. 

5. May a free good ever become an economic good ? Give examples. 

6. Name five articles that are clearly wealth ; and five that are not 
wealth. Which of the following are wealth : 

a. Salt in the ocean? /. Egyptian mummy? 

b. Weeds? g. State penitentiary? 

c. English sparrow? h. Burglar's tools? 

d. Submarine? i. Mississippi River? 

e. Rose bush? j. Climate? 



C 

1. What are the characteristics of a practical man? Explain your 
answer to each of the following : 

a. Is the wealthiest man in your community practical ? 

b. Do you know of any practical man that is not wealthy? 

c. Is the governor of your state a practical man? 

d. Is Rockefeller practical? 

e. Were Presidents Washington and Lincoln practical? 

2. A public speaker recently declared that the typical American 
city would vote to have its alleys paved with sterling silver, provided 
the bill was paid out of the federal treasury. Comment. 

3. The opinion is generally held in the United States that society 
ought to provide free public education. 

a. What does "free public education" mean? 

b. Are free textbooks usually provided for high schools? 

c. Who pays the expense of students in state normal schools and 

universities? 

d. Why do state universities usually charge law and medical 

students a relatively high tuition? 

e. Is free public education free ? 

4. If $1000 a year is a fair wage for a family in Florida, what 
would be a fair wage for an Iowa family that spends $100 a year for 
coal? an Eskimo family that spends $500 a year for whale oil to be 
used for heating purposes? 



THE SOCIAL VIEWPOINT 15 

SUPPLEMENTARY READING 

Bullock, C J., Introduction to the Study of Economics, 3d ed., (Silver 

Burdett & Company, publishers. New York, 1908), pages 84, 87, 

129. 
Ely, R. T., Outlines of Economics, 3d ed., (The Macmillan Company, 

publishers, New York, 1916), pages 105-108. 
Fetter, F. A., Economics, (The Century Company, publishers, New 

York, 1915, 2 volumes). Vol. I, pages 3-12. 
Fisher, I., Elementary Principles of Economics, (The Macmillan Com- 
pany, publishers. New York, 1913), pages 4-13. 
Johnson, A. S., Introduction to Economics, (D. C. Heath & Company, 

publishers, New York, 1909), pages 1-19. 
Seager, H. R., Principles of Economics, (Henry Holt & Company, 

publishers, New York, 1913), pages 50-60. 
Seligman, E. R. a., Principles of Economics, 5th ed., (Longmans, 

Green & Company, publishers, New York, 1912), pages 8-20. 
Taussig, F. W., Principles of Economics, 2d ed., (The Macmillan 

Company, publishers, New York, 1915, 2 volumes), Vol. I, 

pages 3-14. 

Note. — The references found at the close of each chapter are con- 
fined to standard college texts in economies. For additional references, 
see the classified bibliography at the end of volume, pages 411-414. 



CHAPTER II 
NATURE AND CONTENT OF ECONOMICS 

4. Nature of Economics 

How to study economics. — Before taking up the study of 
any new subject it is desirable, in order to avoid wasting time 
and effort, to learn something about the best methods to be 
employed in mastering it. Some subjects, like botany and 
physics, are best approached through experiments carried on 
in the school laboratories. There the pupil learns through 
trial and observation to formulate the laws and principles 
underljang his science. This is known as the inductive method 
of study. The same method, as we shall see presently, may 
be applied to a limited extent to the study of economics. 
More important in our work, however, is the deductive method, 
which requires some ability to reason abstractly — that is, 
independent of expepiment and observation. This method most 
people find difficult to master. For that very reason pupils 
and even business men often become discouraged and give up 
the study of economics. If, however, they would but remember 
that the chief aim of our science is not to discover laws, but 
rather to apply them to business, much of this discouragement 
can be removed. We do not need, for example, to concern 
ourselves with the proof that an increase in the amount of 
money in circulation tends to cause prices to rise. Instead, we 
start with the assumption that such is the case and try to ex- 
plain the rise of prices at some particular time or place. In 
other words, the student of economics finds it necessary to go 

16 



NATURE AND CONTENT OF ECONOMICS 17 

from the general to the particular, while the student of a labora- 
tory science is chiefly concerned in studying particular phenom- 
ena from which he draws general conclusions known as laws 
and principles. 

The nature of an economic law. — Economics, like other 
sciences, has certain important laws which must be mastered 
as we progress in .our study. It is desirable, then, at the out- 
set to understand as accurately as possible the nature of an 
economic law. Scientific laws as a rule merely state tendencies. 
We learn from the study of physics that a metal rod shortens 
as its temperature falls. Suppose, however, that the two ends 
of such a rod be firmly secured. Obviously, then, a lowering 
of the temperature would not cause the rod to become shorter. 
We must not conclude, however, that the law is invalid, for it 
states only a tendency which would have become a reality had 
no opposing force been exerted on the rod. Similarly in 
economics, laws hold good only so long as they are not neu- 
tralized by opposing ones. For that reason it is best to qualify 
an economic law with the expression " tends," or " other things 
remaining equal." Thus, to illustrate, we should not say that 
the fall in price of a particular commodity will increase the 
demand for that commodity. Ordinarily such a statement 
would be correct, but not always. If at the same time the 
prices of all other commodities should fall as rapidly, there is no 
reason to believe that there would be any increase in the 
demand. It would be more correct, therefore, to say that as 
the price of a particular commodity falls, the demand tends to 
rise ; or, as the price of a particular commodity falls, the 
demand, other things remaining equal, will rise. 

Economics as an art. — Hitherto we have spoken of economics 
as a science, which it is ; yet like all other sciences it has an 
art side, which, in the minds of many, is by far the most impor- 
tant. The physicist, to draw another illustration from the 



18 ELEMENTARY ECONOMICS 

physical sciences, is primarily concerned with the purely 
scientific aspects of his subject ; but his labors would be largely 
in vain if he or some one else did not apply to the industrial 
arts the scientific laws and principles which he formulates in 
the laboratory. Discovery of the principle of air pressure is 
one thing, its application to a common cistern pump is another. 
One is science ; the other, art. The same distinction occurs in 
economics. One of the best known economic laws is that the 
wants of any individual have varying degrees of intensity. 
Thus, any one of us may, at a given moment, desire a hat more 
than a pair of shoes, the shoes more than a fountain pen, and 
the pen more than a week-end excursion to some resort. There 
is no assurance, however, that we shall make our purchases in 
the order named. The hatter, the shoe merchant, the stationer, 
and the resort-owner, each presents his wares in the most 
attractive manner, usually by displays and advertising, in 
order to force the demand for his particular commodity or 
service to the fore — that is, to make the want for it more in- 
tense than it otherwise would have been. It may easily happen, 
then, that we shall forego the hat, the shoes, and the pen in 
order to be able to enjoy the week-end vacation. The law of 
the intensity of want, and its application to business in the form 
of attractive advertising, though intimately connected, are 
distinct aspects of the same thing. One is science, the other is 
art. 

Material for the study of economics. — The most important 
field for the study of economics is not found in books, but in the 
business world. He who would master even the most elemen- 
tary problems of economics must study the motives and actions 
of men as they go about the everyday tasks of making a 
living. To do this successfully requires a keen power of 
observation. The student of economics, as he progresses in 
his thinking on economic subjects, will observe more and more 



NATURE AND CONTENT OF ECONOMICS 19 

what had formerly escaped his notice. The botanist, when he 
goes into the country, naturally observes the flowers and trees 
and other forms of plant life ; the geologist watches for unique 
rock formations ; while the student of economics speculates on 
the fertility of the soil, the distance to markets, the feasibility 
of employing labor-saving machinery, and the current wages of 
farm help. We can readily see, therefore, that the field from 
which the student of economics draws his material for study is 
wide and far-reaching. Furthermore, the material he finds 
there comprises not only physical objects such as interest both 
the botanist and the geologist, but also human nature of every 
description and even the souls of men. Consequently, judg- 
ments under such circumstances are difficult to form, and when • 
formed they are often open to hostile criticism. 

5. Divisions of Economics 

Consumption. — The most fundamental notion in economics 
is consumption. It came first in the history of mankind, and 
it seems likely to continue to the end of time as the chief motive 
for economic activity. Desire to consume has been the strong- 
est factor in the development of modern civilization. It is 
the force that has brought the human race step by step from 
the stone age to its present civilization. It accounts for the 
migration of whole nations, for the conquest of continents, 
for the settlement of vast agricultural areas, and for the build- 
ing of populous cities. No other human desire, we may safely 
say, is so universal or so persistent. On it rest not only pleasure 
and enjoyment, education and culture, freedom and independ- 
ence, but also life itself. 

Consumption in its very nature is destructive, for with few 
exceptions we cannot consume without destroying. The food 
we eat is destroyed at once. We consume our clothing more 
gradually. Still longer does it ordinarily take to consume 



20 ELEMENTARY ECONOMICS 

an automobile, while houses often last a lifetime. In any ease, 
consumption takes place, even though no immediate effect be 
discernible. Curiously enough, refraining from consuming a 
good does not usually preserve it intact, for tivie itself is an 
insatiable destroyer. Thus, two elements enter into the 
destruction of goods. One is the inability to consume without 
destroying, such as is the case with food and clothing ; the 
other, the ravages of time, which destroy ruthlessly our food, 
our clothing, our home, and even the pictures on the wall. 

Production. — Following consumption comes the notion of 
production. Primitive man soon found that nature did not 
supply a sufficient amount or variety of goods to satisfy his 
wants. Then and only then did he turn to productive labor. 
Gradually his wants drove him to extend his productive opera- 
tions. Stone utensils and tools appeared. Later he discovered 
how to make bronze, which was followed by iron and steel. 
Long, however, after the discovery of the process of making 
iron and steel, production continued to be characterized by 
direct, hand methods. Not in fact until well after the middle 
of the eighteenth century did machinery, play an important 
part in industry. Marvelous as have been the developments 
of productive processes, important as they are in the history 
of the progress of mankind, we must not forget that they have 
followed closely after an increased desire on the part of human 
beings to consume goods. 

We speak in a general way of the production and consumption 
of goods. It would be nearer correct to speak of the production 
and consumption of the utilities embodied in goods. It is a 
well-known fact that man cannot create matter. We may gO a 
step further and say that man cannot create goods. He can, 
however, by processes of rearrangement, create utilities, which 
after all are the objects of human desire. These we may call /orm 
utilities. He can, for example, with the assistance of nature 



NATURE AND CONTENT OF ECONOMICS 21 

and natural laws, change raw cotton into cloth, thereby creating 
the various utilities embodied in the finished product. Each 
step in the process tends to destroy utilities as well as to create 
them. Spinning the cotton into thread destroys any utility 
the cotton may have had as a material for stuffing mattresses, 
but it creates a new utility in the form of sewing material. 
Likewise, the weaving of the thread into cloth destroys the 
utility of the thread for sewing purposes and creates a new 
utility which cloth alone possesses. 

All the processes necessary to raise the cotton and then 
to turn it into cloth are productive. Yet additional pro- 
cesses — that is, the further creation of utilities — are usually 
necessary before the cloth can be consumed. No one would 
think of going to a cotton mill for the purpose of getting cloth 
for personal consumption. Rather he depends on his local 
merchant to get it for him. Nor does the merchant go per- 
sonally to the factory for his cotton cloth. He gets it by freight 
or express either from the factory direct or from a wholesale 
dry-goods house. Thus, we see that at least two productive 
processes stand between the consumer who desires to utilize 
the cloth, and the weaver who, like the cotton farmer, has 
created form utilities. The railroad, or some other method of 
transportation, carries it to the retail merchant, thereby creating 
place utilities, while the retail merchant, in turn, by keeping the 
cloth until it is needed by his customers creates time arid posses- 
sion utilities. As our modern civilization has developed, all of 
these workers, and often a great many more, are usually neces- 
sary to create the total bundle of utilities embodied in finished 
products ready for consumption. 

Not all work, however, results in the creation of utilities 
desired by man, or even in the creation of any utilities at all. 
One might exert all his strength in an effort to overturn one of 
the pyramids and yet produce nothing. Even if he should over- 



22 ELEMENTARY ECONOMICS 

turn it, no utilities would be created as a result. He would 
be much like the boy whose father made him build a rail fence 
and then tear it down on the plea that the work would keep him 
out of mischief. These are extreme illustrations, yet on every 
hand men labor without positive results, either because of 
ignorance or because of misdirected energy. We may conclude, 
then, that production is the creation of utilities by labor wisely 
and efficiently directed. 

Exchange. — Soon after primitive man began to produce 
he found himself in possession of a surplus of goods for which 
he had no immediate need. Naturally he sought for a neighbor 
who desired to possess his goods and who in turn had goods of 
his own to exchange. Here was the basis for an exchange, pro- 
vided each desired the other's goods and provided further that 
they could mutually agree as to exchange value. This method 
of exchange is known as barter, and in newer countries it per- 
sists to the present day. Barter, however, as we shall presently 
see, gradually gave way to buying and selling in the terms of 
those few commodities, like gold and silver, which practically 
everybody desired to possess. Then the phenomenon of price 
appeared. Men began to see the advantage of exchanging 
their surplus goods for go d or silver, which soon came to be 
known as money, supplying their own needs by purchases with 
the same money. Later banks arose to supply credit to take 
the place of money, which, with the paper money of the various 
governments, has finally come to occupy the most important 
place in exchange. Accordingly, under exchange, which is one 
of the four large groups into which economics is divided, we 
shall study the various functions of money; the principles 
underlying the science of banking; together with the banking 
history of the United States ; domestic and foreign commerce ; 
the tariff ; and causes and effects of price fluctuation. All these 
subjects, we shall see when we take up the detailed study of ex- 



NATURE AND CONTENT OF ECONOMICS 23 

change, are closely related aspects of the same thing — the 
exchange of goods. 

Distribution. — As used in economics the term "distribution" 
means apportioning — that is, the division of the entire social 
income among those who produce it. Ordinarily, we are 
likely to think of distribution in the sense of transportation, of 
buying and selling, of marketing. Distribution, however, is 
static, not dynamic. It concerns itself with the shares that go 
to the different persons and groups that produce, and not with 
the methods or means by which these shares are handed over. 

Strangely enough, distribution, the last of the four great 
economic notions to develop, has become the most important. 
A century ago, and even less, the chief economic concern of the 
world was to increase the output of production. Men who 
built factories and employed women and children to work long 
hours for little pay, were hailed as benefactors of mankind. 
Improvements in the industrial arts have changed the social 
viewpoint. No longer is it feared that the supply of goods is 
likely to be inadequate to normal demands ; or that improve- 
ments and developments in productive processes will lag behind 
any increase in population. Rather is the fear expressed by 
seriously thinking people that many groups of those who assist 
to produce are being inadequately rewarded — that is, that 
they are not receiving a just share of the goods they produce. 
Consequently, the most important problem in economics, the 
one to which economists now give the greatest consideration, 
is concerned with the distribution of the social income. 

Under the subject of distribution we shall have occasion to 
examine the principles governing wages, rent, interest, and 
profits ; the cause and purposes of socialism ; the place of social 
insurance in industry ; and the share of the product that goes 
to the government in the form of taxation. Some of these 
subjects, notably socialism, might well be studied under 



24 ELEMENTARY ECONOMICS 

production, for, as we shall see, the chief demand in the 
socialistic program is the government ownership of the instru- 
ments of production. Yet the whole problem of social unrest, 
as manifested by the socialists, arises from the feeling that 
distribution, as it now exists, is wrong. Also, in some books on 
elementary economics taxation is treated as a fifth division of 
the subject. It may come, however, under distribution, for 
usually taxes, like rent, wages, and interest, are paid directly or 
indirectly from current income. 

EXERCISES AND PROBLEMS 



1. Define the word "laboratory." 

2. Describe briefly a laboratory experiment. 

3. What did this experiment teach? 

4. Why is the laboratory method called the inductive method? 

5. What is the difference between the science and the art of 
physics? of botany? 

6. State some laws that are never m^re tendencies ; some that may 
be tendencies ; and some that are always tendencies. 

a. What is always the shortest distance between two points? 

b. How does pressure on a gas affect its volume? 

c. Do objects always move toward the center of the earth? 

7. Why is consumption said to be fundamental? 

8. What is the relation of consumption to production? 

9. What is the difference between goods and utilities? 

10. When does destruction create utilities? When does it not 
create utilities? 

IL How does a locomotive engineer add utilities to a spool of thread ? 

12. What is the distinction between productive and unproductive 
labor? 

13. How do modern methods of exchange differ from primitive 
methods ? 

14. State exactly the meaning of the term "distribution," as used 
in economics. 

15. Explain the difference between the exchange and the distribution 
of goods. 



NATURE AND CONTENT OF ECONOMICS 25 

B 

1. Would you use inductive or deductive reasoning in working a 
problem in algebra? in building a gas engine? in starting a gas engine? 

2. Cite other instances where you have used inductive reasoning ; 
deductive reasoning. 

3. Name five unproductive occupations. 

a. Why is each occupation unproductive? 

b. Were any of these occupations ever productive ? 

c. Are any of them likely to become productive ? 

4. Why has money exchange very generally displaced barter ex- 
change ? 

a. Name any articles you have ever bartered. 

b. With what difficulties did you meet? 

c. How would money have obviated these difficulties? 

5. Show how water may assume the various kinds of utilities. 

6. Write three economic questions about a horse ; three about a 
house ; three about an automobile. Write about each of these three 
questions which are not economic. 

7. Give examples of unproductive labor that is not criticized. 

8. Mention some instances in which time, instead of destroying 
goods, increases their value. 

C 

1. Adam Smith held that labor to be productive must "realize 
itself" in some "particular subject or vendible commodity." 

a. How would Adam Smith have classified each of the following : 

i. Domestic servant? v. Lawyer? 

ii. Soldier? vi. Merchant? 

iii. Policeman? vii. Opera singer? 

iv. Violinist? viii. Public official? 

b. How would you classify each of the above occupations? 

Why? 

c. What changes, if any, have occurred since the time of Adam 

Smith regarding unproductive labor? 

2. During the summer of 1918 a ruhng of the War Department, 
concerning the employment of men of draft age, raised the question of 
productive and unproductive labor. 

a. Is all labor productive? Explain. 



26 ELEMENTARY ECONOMICS 

b. Is all productive labor essential? 

c. Are the following productive : 

i. Farmers? 
ii. Preachers? 
iii. Teachers? 
iv. Athletic directors? 
V. Professional baseball players? 

d. Which, if any, of the above perform essential labor? Why? 

3. You sell a $30 suit to an old-clothes man for $5. Does this 
indicate that your wealth has been diminished? that the wealth of 
society has been diminished? 

4. Distribution has long since become the most important notion 
in economic problems. 

a. Who share in distribution? 

b. Which group feels most strongly that its share is inadequate ? 

Why? 

c. What is the basis of this feeling? 

SUPPLEMENTARY READING 

Ely, Outlines of Economics, 3d ed., pages 3-15. 

Fetter, Econoviics, Vol. I, pages 3-10. 

Fisher, Elernentary Principles of Economics, pages 1—4. 

Seager, Principles of Economics, pages 1, 2. 

Seligman, Principles of Economics, 5th ed., pages 23-35. 



PART II 

THE CONSUMPTION OF ECONOMIC GOODS 



CHAPTER III 
NATURE OF CONSUMPTION 

6. Motives behind Economic Activity 

Preservation of life. — Obviously, the most fundamental 
motive for economic activity is the preservation of human life ; 
yet most people, we may assume, have never experienced any 
mental or physical pain owing to a lack of food to sustain mere 
existence or of clothing to keep them fairly comfortable. In 
other words, the typical man, though he may worry about meet- 
ing bills, and often wonder just how he is going to be able 
pecuniarily to do this or that, seldom, if ever, seriously con- 
siders the probability of death from starvation or exposure. If, 
however, he were driven to this extremity he would fight bitterly 
against any odds to secure the minimum of food, clothing, and 
shelter ; for not to do so would inevitably mean death. 

Desire for comforts. — Fortunately for the progress of 
civilization the normal individual is not satisfied with a bare 
existence. He desires more and a greater variety of food than 
will merely sustain his physica strength sufficient to permit 
him to go about his daily tasks. He might be able to get along 
and even thrive on the coarse fare of the early pioneer, yet he 
demands something more in the way of delicacies, fresh vege- 
tables out of season, or ice cream. Also, in so far as physical 
comfort is concerned, a rough woolen shirt, a pair of overalls, 
heavy shoes, and a shoddy coat would suffice. But no self- 
respecting American would be satisfied with such an outfit com- 
prising his whole wardrobe. Comfort in the matter of clothing 

29 



30 ELEMENTARY ECONOMICS 

means more than protection and warmth. It means some 
style in the way of an extra suit for Sundays and hohdays, hnen 
collars, neckties, and other accessories. Likewise, in the matter 
of the home the normal individual desires more than one or two 
shabbily furnished rooms with none of the comforts in the way 
of rocking chairs, pictures, musical instruments, or attractive 
dishes. Obviously, he could exist, and even live to an old age, 
as his early ancestors did, without any of these comforts. 
Yet he refuses to do so, and in his refusal we find the second 
chief motive for his economic activity. 

AVhat has been said leads naturally to the significant question : 
What are comforts? The term is a relative one, much like 
such terms as heat, cold, and dark. Wliat to one group or to one 
individual is a comfort may appear to another as a luxury or to 
a third as a necessity. For most people a fur-trimmed overcoat 
is a luxury. The well-to-do consider it a comfort, while the 
very rich might well look on it as a necessity. We may say, 
roughly speaking, that whether or not a social group or an 
individual considers goods needed above the bare line of 
subsistence to be necessities, comforts, or luxuries, depends in a 
large part on habit and standard of living, about which we 
shall have more to say later. 

Desire for luxury and ostentation. — A third motive for 
economic activity is the desire to consume what we may un- 
mistakably call luxuries, and by their consumption to be 
recognized as superior beings. Evidences of such a desire are 
to be found on every hand. Ultra -styhsh clothing made from 
exclusive patterns by custom tailors, luxurious automobiles, 
diamonds, and fine houses bring recognition, though their 
display for the purpose of attracting attention may be, and 
usually is, vulgar. Yet the desire to get these luxuries to 
satisfy an unhealthy appetite for the extreme, and to display 
them for the purpose of gaining social distinction, drives men 



NATURE OF CONSUMPTION 31 

to gi'eater economic activities than they otherwise would under- 
take ; and for that reason we, as students of economic questions, 
must consider them seriously, even though as individuals we 
may look on them with indifference or even with contempt. 

The desire for luxuries and ostentation leads to many curious 
results. It might be thought on the first impulse that only 
rich people have these desires. Such, however, is not the 
case. Fine clothing and other forms of ostentation are often 
not safe criteria of the owner's financial standing. Many a 
rich man goes more poorly dressed than one of his lowest-salaried 
clerks, while his home may be less elegant than that of his 
private secretary. Any merchant of women's ready-to-wear 
garments will testify that many of his best customers for high- 
priced clothing are the poorly-paid clerks of the variety stores, 
telephone operators, and cheap office assistants. Sellers of 
jewelry, furniture, and men's clothing, and the managers of high- 
priced places of amusement, not to mention a great many 
others in similar lines of business, corroborate this testimony. 
The same desire leads also to much of the crime with which 
society is plagued. Now and then some one steals a loaf of 
bread or a cut of meat to keep himself or his family from starv- 
ing, or falsifies his books to provide the simple comforts of life. 
More often, we may safely say, the cause of dishonesty is the 
desire to purchase luxuries with which to make a display. 
As it is with theft, so it is with most other forms of crime : 
the desire of the individual to enjoy luxuries and ostentation 
overcomes his dread of the punishment he can expect if dis- 
covered. 

Desire for power. — Wealth is power. It gives its owner an 
influence which he otherwise would not possess. It manifests 
itself in politics, government, industry, education, and even in 
religious affairs. The owner of wealth, other things being 
equal, is usually preferred over his neighbor. He receives at 



32 ELEMENTARY ECONOMICS 

the hands of society a distinction which few individuals are 
able to forego. Most people speak in more or less awe of a 
Rockefeller, a Morgan, or a Vanderbilt. They also defer to 
the local magnate. They take pride in elevating men who have 
succeeded in a large way financially. Consequently, the desire 
for the power, which wealth brings, drives men, usually those 
who already have large financial holdings, to exert themselves 
to accumulate more wealth. Thus, we see that this desire is 
one of the chief motives back of economic activity. 

Of the four motives which we have examined, the last, the 
desire for power, is by far the most questionable ; and in it lie 
grave dangers to society. No one can seriously question the 
purity of the motives that drive men to conserve their lives and 
to get the comforts that make life worth living. Also even the 
most serious-minded can afford to smile indulgently on those 
who crave luxuries and ostentation. Society cannot, however, 
look with indifference on the power that can be gathered into 
the hands of a few through the accumulation of wealth. Not long 
ago a prominent New York banker contended in a meeting of 
economists that it mattered little to society if a few men held 
practically all of the wealth of the United States. The basis 
of his contention was that these few could not possibly consume 
their wealth, and, consequently, that it would eventually find 
its way back to the masses. Clearly, he did not understand 
that society was keenly interested in the power and influence 
which the wealth itself would place in the hands of these few 
men. 

7. Nature of Demand 

Demand is effective desire. — The word "demand " is used in 
our everyday speech in a variety of ways, but in economics it 
has a particular significance which we shall attach to it here- 
after. The mere desire for goods does not lead to the satis- 



NATURE OF CONSUMPTION 33 

faction of wants, though desire is the first step in that direction. 
Practically every one, we may safely say, desires to own an 
automobile ; yet it is a well-known fact that only a small per 
cent of the people of the United States enjoy that distinction. 
In other words, to change shghtly a well-known expression, 
" If desires were horses, beggars would ride." Obviously, then, 
the desire for a good may or may not result in the acquisition 
of that good. Something more is needed. The desire must 
be made effective ; and when a desire becomes effective we 
call it demand. Thus, we can define demand as effective desire. 

The question may properly be asked at this point : When 
does a desire become effective — that is, when does a desire 
become a demand ? A complete answer to the question will be 
found a little later in the discussion of demand, for it involves 
the principle, underlying price. We can, however, at this stage 
in our progress, say that the demand for a good emerges when 
the one who desires to possess it is willing and able to produce 
the good directly or to forego the use of some other good or 
goods which he may exchange for it. Suppose, for example, 
that a shipwrecked man, like Robinson Crusoe, desires some 
sort of protection against the sun, such as an umbrella. He 
might, as he suffered from the heat, continue to desire an um- 
brella without having a demand for it. Suppose again that he 
should conceive the idea of constructing one from materials re- 
covered from the wreck and that he was fully aware of the labor 
involved. Even then there would be no demand. If, how- 
ever, he actually constructs the ujnbrella, we may conclude 
that his desire has become effective — that is, it has become 
a demand. 

Relation of demand and price. — Much more common, how- 
ever, are the cases when desire becomes demand as a result of 
the willingness of the one having the desire to pay the current 
market price either in money or in other goods. Suppose a 



34 ELEMENTARY ECONOMICS 

certain individual desires to own an automobile. He has the 
money in the bank to pay for it, but hesitates to buy at the 
price named. Clearly, his desire in this case is nothing more than 
a desire. Certainly, it has not yet become a demand, for demand 
would mean a sale. Suppose, to continue the illustration, he 
decides to buy the automobile. Then his desire has become a 
demand. 

We have assumed above that the demand for the automobile 
came as a result of an increase in the intensity of desire. It 
might, however, have come just as easily, or even more easily, 
from a lowering of the price. The principle of reducing prices 
to change desires into demands is significant in at least two 
respects. First, it is the underlying reason for price reductions 
on the part of retail merchants. Second, it shows that demands 
ordinarily increase with a fall in price. In fact, as price falls 
demand and desire tend to become equal. When any one says, 
therefore, there is little or no demand for a particular good, he 
means a demand at the current price. Any other assumption 
would be incorrect, for a proper lowering of the price would 
ordinarily create a demand sufficient to take the entire stock. 

8. Elasticity of Demand 

Nature of an elastic demand. — '- All demands are more or 
less elastic ; that is, the demand for any particular good tends 
to increase as its price falls. In the case of some, the increase 
is very rapid, of others, very slow. Somewhere between these 
two extremes is an indeterminate boundary line separating 
elastic demand from inelastic demand. Elasticity of demand 
is, therefore, a relative term, since no demand is absolutely 
elastic or absolutely inelastic. Generally speaking, the demand 
for luxuries is elastic, for each slight decline in price t«nds to 
cause a relatively large increase in demand. Literally thousands 
of men were persuaded a few years ago to buy a certain make 



NATURE OF CONSUMPTION 



35 



of automobile when the price was reduced but a little more 
than ten per cent. Conversely, a general increase in the prices 
of automobiles caused by the Great War had an immediate effect 
in curtailing demand ; though in this particular case curtailment 
was not as great as it would have been had there not been a 



y 
p' 



I 

\ 


w 


E 

\ 


s 


S' 






\w' 


\^ 












E' 








^I' 







V V M 



M' 



X 



Fig. 1. 



rise in the prices of practically all other goods. Curve EE' in 
Fig. 1 serves to illustrate the character of an elastic demand. 
A fall in price from OP' to OP (that is, from MS to M'S') causes 
an increase in the demand from OM to OM' (P'S to PS'). 

Inelastic demand. — The demand for necessaries and com- 
forts is less elastic than the demand for luxuries. A slight 
decrease in the prices of common table salt or matches, for 
example, would be unlikely to increase appreciably the demand 
for either of these commodities. Even a sharp decrease in 
price would cause few people to increase their consumption of 
either, simply because more salt in the food or more matches 



36 ELEMENTARY ECONOMICS 

on the shelf are not desired. Bread also has an inelastic demand, 
but to a less extent than salt or matches. So also have the 
plainer kinds of food, the more common articles of wear, and 
all the other goods that enter into everyday consumption. In 
Fig. 1, curve 11' represents an inelastic demand. It will be 
noticed that it is much more abrupt than the more gentle elastic 
curve EE'. At the price OP' (VW) we assume that the volume 
of demand is OV (P'W). As the price declines the increase in 
demand is slight. At the new price OP (VW) the deriiand is 
OV (PW), which is slightly more (VV) than it was at the old 
price. 

Elasticity of demand and price fluctuation. — On first im- 
pulse one might think that price fluctuation would be greater . 
under an elastic than under an inelastic demand. But such is 
not the case. The very moment the price of a good with an 
elastic demand starts to fall, numerous buyers will come into 
the market, with the result that the fall in price is retarded and 
soon stopped. Likewise, an increase in price diminishes at 
once the demand, which in turn tends to keep the price down. 
In the case of goods with an inelastic demand, however, such 
retarding influences are much less effective. A change in the 
price of salt affects demand but slightly. Few new customers 
appear when the price declines, few quit buj'ing when the price 
rises. The importance of this economic principle appears when 
we consider it in connection with the production of wealth. A 
bumper crop of wheat, for example, is likely to result in rock- 
bottom prices with a considerable loss to wheat-growers. On 
the other hand, the manufacturer of some luxury who should 
overestimate the demand for his product to the same degree, 
would suffer a less proportionate loss than the farmers, for 
multitudes of potential buyers are ready to buy just as soon as 
the price of the luxury is slightly reduced. 

The close relation of price fluctuations to the two kinds 



NATURE OF CONSUMPTION 37 

of demand, has a practical significance in business, particularly 
in retailing. It is a common practice of merchants in all lines 
to advertise cut prices, hoping thereby to increase trade in the 
merchandise they advertise. Obviously, any increase in trade a 
merchant may hope to get must either come from his competitors 
or arise from an increased demand for those particular goods. 
Whether or not the goods advertised have an elastic or an 
inelastic demand, the advertising merchant will profit from 
any trade he may get from the regular customers of his com- 
petitors, provided he sells at a profit. Also, in goods subject 
to an elastic demand, there is always the probability that the 
advertising merchant may increase his sales, not at the expense 
•of his competitors, but by increasing demand for the goods which 
he advertises. In goods subject to inelastic demand the case 
is different. If he offers such goods at reduced prices, his 
customers stock up and then refrain from buying more until 
their stock is exliausted ; and what is not less important, his 
competitors reduce prices on the same goods. In such cases 
buyers profit at the expense of the competing merchants, who are 
unable to recoup themselves, simply because the goods under 
consideration are subject to the law of inelastic demand. A 
jeweler, for example, can well afford to attempt to increase 
his trade by selling diamonds on a lower margin of profit than 
his competitors, for by so doing he stands a chance, not only to 
sell to some of the regular customers of his competitors, but 
also to those who otherwise would not buy diamonds ; and 
thus in the long run, on account of increased sales, to increase his 
profits. The grocer, however, finds his position more difficult. 
By selling coffee or sugar or salt at reduced prices he can hope 
to increase sales only at the expense of his competitors or at the 
expense of his own future sales ; he often does, however, sell 
such commodities on a close margin or even at a loss in order 
to induce new customers to come into his store. 



38 ELEMENTARY ECONOMICS 

EXERCISES AND PROBLEMS 



1. Name as many motives for economic activities as you can. 

2. Do these motives cause the same activities in all localities? in 
all groups ? 

3. What is the distinction between necessities and luxuries? 

4. Which of the following are luxuries? which necessities? 
a. Bread. /. Automobile. 

h. Bicycle. g. Face powder. 

c. Watch. h. Kodak. 

d. Diamond ring. i. Newspaper. 

e. Fountain pen. j. Magazine. 

5. Just how is wealth power? 

6. What is the difference between desire and demand ? 

7. Which is the more fundamental? 

8. When is the demand for a good said to be elastic ? inelastic ? 

9. Why does the price of potatoes usually fluctuate more widely 
than the price of pineapples ? 

B 

1. What motives for economic activity are the most noticeable 
among your acquaintances? 

2. Make a list of your wants arising from instinct ; from habit ; 
and from social standards. 

3. Name any wants not included in the above list. Why do they 
arise ? 

4. Mention eight articles of your own consumption which you 
consider luxuries ; eight which you consider necessities. 

5. How do producers in your community seek to increase the desire 
for goods? 

6. Examine store and shop windows and try to determine whether 
or not the effectiveness of their display could be increased. 

7. Make a list of ten articles sold by your grocer; ten by your 
druggist ; and ten by your hardware dealer. Arrange the articles 
in each list according to elasticity of demand. 

8. Which of these articles, if any, have changed in elasticity during 
the past generation? 



NATURE OF CONSUMPTION 39 

C 

1. "The true welfare of society depends on all having the necessities 
of life before any has luxuries." 

a. What is meant by "true" welfare? 

6. Would an equal distribution of goods necessarily supply all 
with necessities? 

c. After all have been supplied with necessities, which luxury 

should be produced first ? 

d. Does a demand for luxuries ever cause an increase in goods 

classed as necessities? 

2. Explain the purpose of such advertising as, "Dollar and a half 
caps now ninety-eight cents"; "These gloves are worth two dollars, 
now a dollar and a quarter" ; "Buy now, when this supply is gone no 
more can be obtained." 

3. A stock-raiser recently complained that the use of the auto- 
mobile as a pleasure vehicle tended to lower the price of driving horses. 

a. Are driving horses worth more or less now than they were ten 

years ago? 

b. Account for other forces that may have affected the price of 

driving horses. 

c. Would the above statement be necessarily untrue if driving 

horses are worth more now than they were before pleasure 
ears came to be so widely used? Explain. 

4. Suppose the supply of several goods be doubled, would the fall 
in price be the same for each ? Explain. 

5. "The demand for a given commodity may be elastic at one price 
level and inelastic at another." Illustrate and explain. 

6. The claim is often made that the storage of eggs results in lower 
prices during the winter months than would otherwise be the case. 

a. How are summer prices affected? 

b. How is the average annual price affected ? 

SUPPLEMENTARY READING 

Bullock, Introduction to the Study of Economics, 3d ed., pages 79-110. 

Ely, Outlines of Economics, 3d ed., pages 103-110, 156-164. 

Fetter, Economics, Vol. I, pages 46, 61. 

Johnson, Introduction to Economics, pages 68, 69. 

Seager, Principles of Ecojiomics, pages 70-80. 

Seligman, Principles of Economics, 5th ed., pages 240-245. 

Taussig, Principles of Economics, 2d ed., Vol. I, pages 138-158. 



CHAPTER IV 
LAWS OF CONSUMPTION 

9. Human Wants Are Unlimited 

Variation in the intensity of wants. — We have seen already 
that human wants can be arranged in a general way in the order 
of their intensity. Any individual at any moment of time has 
a variety of unsatisfied wants, which he proceeds to satisfy, as 
far as he is able, in the order of their intensity. Standing 
first of all are the wants for food, clothing, and shelter, though 
few of us are conscious of such wants, since they are satisfied 
rather automatically as they arise. Then come the wants of 
less intensity, the nature of which depends on the peculiar 
desires of each individual. In arranging these wants in their 
order we must necessarily assume that differences in the prices 
of the goods which will satisfy them are a factor ; for it is obvious, 
for example, that one might have a more intense want for an 
automobile than for a bicycle, and yet purchase the latter. 

Differences in the intensity of wants account in large measure 
for modern advertising and modern window display. Each 
advertiser, as we have already noticed, expects to increase his 
business at the expense either of his competitors in the same 
line or, by creating demands for his particular goods, of sellers 
in other lines. The first of these expectations we may neglect 
at the present, for it is usually realized, if at all, by lower 
prices, better service, and good will. The second we will 
examine at this point. A retail clothier, let us say, advertises 
through the newspapers or by handbills and display boards the 

40 



LAWS OF CONSUMPTION 41 

excellence of the goods which he has for sale. At the same tune 
he also arranges his windows and displays his stock so as to make 
his goods appear as attractive as possible to prospective pur- 
chasers. If every one could determine exactly just when he 
needed a new suit of clothing and governed himself accordingly, 
the only object a clothing merchant would have in advertising 
would be to get business away from competitors in the same 
line. The normal individual makes no such calculations, and 
except when certain dress-up days, such as Easter, approach, 
few men give any serious consideration to the purchase of 
clothing unless prompted by some outside influence. In other 
words, the intensity of the want for a new suit of clothing is 
usually low. Knowing this, the seller of clothing exerts him- 
self through advertising and display to stimulate the demand 
for clothing ; that is, he endeavors to increase the intensity of 
the want for his goods to the point where sales can be made. In 
causing the need for a new suit of clothing to jump, as it were, 
over the heads of other needs more intense, the clothier has 
postponed, if not destroyed, the sale of goods in some other line. 
No limit to human wants. — We have seen also that there 
is no limit to human wants, though we must keep clearly in 
.mind that there are limits to demands for goods. If any one 
of us should attempt to enumerate all the goods he wanted, it 
would be an endless task. Each individual has wants not only 
beyond what eventually become demands, but also for goods 
which he never hopes to possess. Many of these remote wants 
have little intensity ; they are wants nevertheless. The child 
that cries for the moon or the young person that builds castles 
in Spain, expresses an unmistakable want, even though he 
does not realize the embarrassment that would come from 
having it gratified. The principle of the insatiability of wants 
has an important application to industry, particularly to 
production. Manufacturers and other producers need usually 



42 



ELEMENTARY ECONOMICS 



have no fear that their products will not be wanted. They 
must remember, however, that they can profit from these wants 
only when they rise to the dignity of demands. 

Wants and social progress. — The very fact that wants are 
incapable of being satisfied has led to our present state of 
civilization. Any individual or social group, such as a people 




Courtesy of Hart, Schaffner & Maij. ( innhjn, lU. 

Window Display of a Specialty Store. 
(Contrast with display on opposite page.) 

or a nation, that has all of its wants satisfied, is in danger of 
decay, if indeed it has already passed beyond the stage of 
savagery. Many good causes have been assigned for the lack 
of social and industrial progress among the American Indians, 
the best of which is that they did not have wants sufficiently 
varied and intense to compel them to give up their roaming life 
and to make a start in permanent agriculture — in other words, 



LAWS OF CONSUMPTION 



43 




CouTtesy of S. S. Kresge Co.. Chicago, III. 

Window Display of a Variety Store. 

(Contrast with display on opposite page.) 



44 ELEMENTARY ECONOMICS 

to go to work. The same influence partially explains the differ- 
ences in the social and industrial developments among various 
peoples. The inhabitants of tropical and subtropical regions 
are notoriously unprogressive. They feel no need for permanent 
shelter and warm clothing, and even the getting of sufficient 
food is a simple matter. Granted that the warm climate 
dampens their enthusiasm for work, the significant fact remains 
that the kindness of nature in supplying their primitive wants 
robs them of their best energies. Very cold climates, on the 
other hand, compel so much labor to provide bare necessities 
as to leave little time for supplying higher wants. It is, there- 
fore, in the temperate regions where we find the highest develop- 
ment of civilization. There nature is neither too liberal nor too 
exacting. There men, though they must supply their primitive 
wants by labor, have a sufficient surplus of time and energy 
left to supply their wants for higher things. 

On the ground that an increase in wants produces social 
progi'ess we find one of the chief justifications for much of 
modern advertising. There are some who contend that 
advertising merely results in changing the demand either from 
one kind of a good to another or from one good to a similar 
good merely of a different make and brand ; in other words, 
that advertising is largely a social waste. Such a contention is 
certainly sound to a degree, but above and beyond is the infiu- 
ence which advertising has on stimulating individuals to greater 
endeavors through an increase in the intensities of their wants. 

10. The Law of Diminishing Utility 

Statement of the law. — Although the sum total of human 
wants is incapable of being satisfied, each individual experiences 
daily the satisfaction of particular wants, in any one of which 
he can observe the law of diminishing utility. This law, stated 
briefly, is that as identical units of a good are consumed, the 



LAWS OF CONSUMPTION 45 

satisfaction derived from any unit is less than the satisfaction 
derived from the preceding one. By substituting the word 
" possessed " for the word " consumed " in the above definition 
the law may be made to apply to a stock of identical goods not 
actually in the process of consumption. 

The law illustrated. — The most obvious illustrations of the 
law of diminishing utility are found in the consumption of 
food. A healthy boy with a plate of apples before him will eat 
the first one eagerly. The second he will consume with relish. 
Likewise, the third, the fourth, the fifth, and perhaps the sixth 
yield satisfaction. Finally, no matter how great his appetite 
may be, the point will be reached when he cannot eat another one. 
This point of satiety could be pushed ahead somewhat by sub- 
stituting other kinds of fruit and especially such foods as meat, 
potatoes, and bread, thus offering a variety. Even then the 
law holds true, though its operation is not so easily seen as it 
was in the case where apples alone were considered. As it is 
with food so it is with all other consumable goods. One suit 
of clothing is a necessity. A second suit for Sundays and holi- 
days is desirable. A third suit perhaps would serve a good 
purpose. Each yields less satisfaction than the preceding one, 
until finally the most fastidious dandy in the world would not 
care to have another. Obviously, as in the case of food, the 
satisfaction derived from each additional suit will diminish more 
rapidly if all the suits are exactly alike ; yet no matter how great 
the variety in color, texture, weave, or style, the law of diminish- 
ing utility holds true. Occasionally there are outstanding 
exceptions to the law, which, however, do not invalidate it. 
The first mouthful of some foods often gives less satisfaction 
than the second or third. Because of this fact many persons 
are compelled " to learn " to eat, for example, oysters or olives. 
Similarly, some habitual drinkers find that they like the second 
or third glass of liquor better than the first. 



46 ELEMENTARY ECONOMICS 

11. The Law of Marginal Utility 

The law stated. — We have already established the principle 
that the possessor of a suit of clothing values that suit more 
highly than he would a second one exactly like it, and that 
a third would yield even less satisfaction than the second. Let 
us suppose, then, assuming that he has three suits exactly alike, 
that he attempts to determine the value to him of any one of the 
suits. We have seen that one suit was absolutely necessary, 
and that the other two were much less so. Certainly, then, 
being in possession of three suits, he will not say that any one 
of them is necessary, for he would still have two left if one were 
taken away. Obviously, therefore, the valuation he will 
place on any one of the three suits would be less than the val- 
uation he would place on one suit if he possessed no other. 
Nor, by the same reasoning, will he value any two of the three 
suits as highly as he would if he had but two. He will, however, 
consider any one of the three suits as having exactly the same 
value to him as another suit would have if he already possessed 
two. We are now ready to state the law of marginal utility : 
The marginal utility of a series of goods is the utility of the last 
unit. This utility, we may say, is measured by the use to which 
the last unit can be put. If, to use an extreme example, he 
used the third suit to dress a manikin, then the value he would 
attribute to any one of the three suits would depend entirely on 
the satisfaction, slight as it might be, which he would derive 
from that particular use. 

The law further illustrated. — We can understand more 
clearly how the law of marginal utility operates by selecting 
our illustrations from fanciful though striking conditions of 
life. Let us suppose that a lone traveler in a large forest has 
among other things a gun and ten cartridges. Let us suppose 
further that he calculates that five of the cartridges will suffice 



LAWS OF CONSUMPTION 47 

to protect him from wild beasts and savages ; that three will 
provide him with game, which it is not absolutely necessary 
to have since he has a sufficient supply of bread and salted 
meat to sustain him on the journey ; and that two will furnish 
him amusement in firing at a target. We may now properly 
raise the question : What value does our traveler place on any 
one of the ten cartridges, which, we have assumed, are exactly 
alike in every respect? To arrive at an answer, let us suppose 
that before he has had a chance to use a single one of them he 
accidentally loses two. Since they are all exactly alike, which 
two has he lost? Two of the five which he expected to use in 
defending his life? Two of the three he expected to use in 
procuring fresh meat? Assuredly not. Being a sensible 
traveler he will forego shooting at the target. Here, then, we 
find the answer to our question. The value which our traveler 
places on any one of his ten cartridges is measured by the satis- 
faction he will derive from the least important use to which he 
has planned to put them. To push the illustration, let us 
suppose that the traveler loses five of the ten. What now will 
be his conduct ? Will he shoot at a target ? Will he shoot game 
for food? Here again the answer is. No. The decrease of the 
number of cartridges from five to four may mean the loss of 
his life, which certainly he values more highly than the pleasure 
he would get from shooting at a mark or from feasting on fresh 
meat. Conversely, if after losing five of the cartridges he finds a 
sixth, we may believe that the possession of the sixth cartridge 
causes his marginal utility for cartridges to fall, since now he can 
and will use one of them to gratify a want which he was un- 
willing to gratify when he had but five. 

To illustrate the same law in another way, let us suppose 
that a shipwrecked sailor finds himself adrift in a rowboat 
with his dog and two biscuits. Let us also assume that the 
sailor values his own life more highly than he does that of the 



48 ELEMENTARY ECONOMICS 

dog, and that he knows that one biscuit for him and one for the 
dog will sustain the life of both until they are picked up. With 
these notions clearly fixed in mind, the sailor loses one of the 
biscuits in the water. Which biscuit did he lose, his biscuit or 
the dog's biscuit? Supposing, as we have, that he values his 
life more highly than he does that of the dog, and that he will 
need to consume an entire biscuit to sustain life until picked up, 
our answer must be that it was the dog's biscuit which fell 
overboard. 

Applications of the law. — The law of marginal utility, 
though we may not be conscious of the fact, is closely related 
to many of our everyday acts and to many of our comparisons 
of values. Usually, for example, when we purchase a pair of 
shoes, we could, if we cared to do so, purchase a second pair 
exactly like the first. Our reason for not purchasing the 
additional pair is that the use to which we could put any one 
of the two pairs will yield less satisfaction than we can get from 
the same amount of money spent for some other good, say a 
hat. We will, however, purchase the second pair if the mer- 
chant reduces the price sufficiently to meet the satisfaction 
which we estimate a second pair of shoes would give us. Practi- 
cally all of the buying in quantities of consumable goods is 
governed more or less by this law. 

In making comparisons of the values of certain goods we 
often fail to arrive at correct conclusions because we ignore the 
law of marginal utility. Suppose the question were asked : 
Which is the more valuable, gold or iron? diamonds or bread? 
perfume or water? Obviously, bread and water are necessary 
to sustain life, while modern civilization is built on iron. Yet 
water is usually free for the taking, while bread and iron are 
among the cheapest of staple goods. To clear the way for a 
correct answer we must first contrast the marginal utility of a 
good with its total utility. The marginal utility of gold is much 



LAWS OF CONSUMPTION 49 

greater than the marginal utility of iron ; that is, the loss of a 
unit of gold would be more keenly felt than the loss of a similar 
unit of iron. The total utility of iron, however, is much greater 
than the total utihty of gold. Perhaps the matter will be clearer 
if instead of gold and iron we consider perfume and water. 
We use water in a great variety of ways, some of which yield 
satisfactions of a very low degree. On the other hand, the poor- 
est use to which we put perfume is likely to yield a relatively 
high satisfaction. For this reason the marginal utility of 
perfume is greater than the marginal utility of water. We 
must, however, keep clearly in mind the fact that the total 
utility of water is greater than the total utility of perfume, for 
without the former we would find it impossible to sustain life 
itself. While the latter we could forego entirely with no serious 
effect other than a comparatively few people being incon- 
venienced. 

The relation of marginal utility of water to its total utiliiy is 
shown graphically in Fig. 2. The incompleted rectangle A, 
which we will leave open at the top since few if any would be 
willing to set a value on their own lives, represents the greatest 
satisfaction an individual can get from the consumption of 
water. Rectangle B represents the satisfaction derived when a 
second unit of water is put to a less important use, say in 
cooking, while rectangles C to M represent decreasing satis- 
factions resulting from decreasingly important uses. Since 
water is practically a free good we can assume that the height 
of M is zero. In this case the marginal utility of water would 
be zero while its total utility would be infinitely great. 

We may now properly consider the relation between the 
marginal utility and the total utility of a good which is neither 
necessary to sustain life nor free for the using. A good example 
is dining-room chairs. Obviously, as was the case in the earliest 
frontier homes, any American family could do entirely without 



50 



ELEMENTARY ECONOMICS 



the use of chairs in the dining-room. We will assume, however, 
that common decency demands two chairs, each yielding exactly 
the same satisfaction, represented in Fig. 3 by rectangles A and 




B. A third chair (C) may also be desired, though it would 
yield less satisfaction than the first or second. Even a fourth 
(D), fifth (E), and sixth (F) can be used occasionally to advan- 
tage. 

The marginal utility of the six chairs is represented by the 
rectangle F. The total utility of the six is found not by mul- 
tiplying the rectangle F by six, but by adding all the rectangles. 

Consumers' surplus. — The rectangle F in Fig. 3 represents 
not only the marginal utility of the six chairs, but also the price 
paid for each of the six. The total price, therefore, of the 
six is represented by the rectangle PO. Clearly, then, the 



LAWS OF CONSUMPTION 



51 



purchaser of the six chairs enjoys a greater satisfaction from five 
of them than he would have enjoyed had he spent his money 
for other goods, for we may assume that the utihty yielded by 
the sixth chair is measured by the price of each of the six chairs. 
This excess satisfaction is known as consumers' surplus. In the 
case of each chair it is the difference between the price paid, 
represented by the margin, and the price that would have been 
paid rather than to forego its use. 

The principle of the consumers' surplus is the basis of all 
trade and exchange. In the middle ages the opinion prevailed 
that only one party to a trade could be benefited. This opinion 



y 


































p 






P 


A 


B 


C 


D 


E 


F 







X 



Fig. 3. 



we now hold to be erroneous. In practically all of our pur- 
chases and exchanges, even though we desire but a single unit 
of any good, we enjoy a consumers' surplus. If such were not 
the case few exchanges would take place, since each one would 
prefer his own goods to the goods of another. 



52 ELEMENTARY ECONOMICS 

EXERCISES AND PROBLEMS 



1. What evidence is there that the sum total of human wants cannot 
be satisfied? 

2. Why does a clothier often advertise without mentioning prices? 

3. How does variety affect consumption? 

4. Does the law of diminishing utility apply to the possession of 
money ? 

5. If the supply of goods be increased, how would the value of each 
unit be affected? the value of the total stock? Explain. 

6. Why is money usually said to have a " reflected " marginal 
utility? 

7. Explain the conditions under which a large consumers' surplus 
would exist ; a small consumers' surplus. 

8. Why is it more difficult to measure the consumers' surplus of water 
than of oranges? 

B 

1. Compare the window display of a ten-cent store with the window 
display of a dealer in ladies' ready-to-wear garments in the following 
respects : 

a. Variety of goods displayed. 
h. Price tags. 

c. Attractiveness. 

d. Effect on intensity of wants. 

2. Name 25 nationally advertised goods. Why does a monopolist 
advertise his products? 

3. Make a list of ten of your personal wants in the order of their 
intensity. Would this order be changed if each were multiplied by 
^ve? 

4. Make a list of the articles you would buy if you had .SIOO. How 
would this list be affected if, instead of 1100, you had $200? 

a. Would the number of items be increased? 
h. Would the first list contain items not included in the second 
list? 

c. Would the second list contain the same amount of any item 

or items included in the first list? 

d. Is it likely that the second list will contain but one item? 



LAWS OF CONSUMPTION 53 

5. Call to mind some recent purchases you have made. In which 
did each of the foUoAving have an influence : 

a. LaA^^ of diminishing utility ? 
h. Law of marginal utility? 
c. Consumers' surplus? 

6. Estimate the amount of consumers' surplus in the purchase of a 
lead pencil, a pair of shoes, a dish of ice cream, a loaf of bread, a suit 
of clothing. 



1. Many people condemn window displays and advertising as an 
economic waste. Discuss from the standpoint of : 

a. Social progress. 

h. Service to the consumer. 

c. Good will in merchandising. 

2. A prominent lawyer recently told the story of how his greatest, 
unattained ambition when a boy had been to own a shotgun. Now he 
has wealth enough to buy hundreds of such guns, but has not one. 

c. Account for his change in desires. 

h. Did he have a demand for a gun when he was a boy? 

c. Has he now a demand for a gun? 

3. "A clothier, when he goes into the market to buy goods, usually 
has some adequate notion of the marginal utilities of his customers.'" 

a. Why do some clothiers handle only expensive clothing ? 

h. Why do others handle cheaper grades? 

c. Why do some handle both expensive and cheap grades? 

SUPPLEMENTARY READING 

Bullock, Introduction to the Study of Economics, 3d ed., pages 84r-96. 

Ely, Outlines of Econo7nics, 3d ed., pages 132-139. 

Fisher, Elementary Principles of Economics, pages 281-300. 

Johnson, Introduction to Economics, pages 23-28. 

Seager, Principles of Economics, pages 89-100. 

Seligman, Principles of Economics, 5th ed., pages 173-184. 

Taussig, Principles of Economics, 2d ed., Vol. I, pages 124-137. 



CHAPTER V 
DEMAND, SUPPLY, AND PRICE 

12. Relation of Demand and Supply to Price 

Nature of demand and supply. — No two terms employed in 
the language of economics are better known and oftener mis- 
used than demand and supply. One of the most severe critics 
of our subject once said that a parrot could be made an 
economist by merely teaching him to answer " demand and 
supply " to every question put to him. This statement was 
extreme and meant to ridicule. Yet it has a sound foundation, 
for relatively few people have ever seriously attempted to 
analyze the nature of these terms. We have already seen that 
demand is effective desire ; also that an individual has a demand 
only when he is willing and able to satisfy it by foregoing the 
use of other goods — that is, to pay the current price. Desires, 
therefore, are constantly becoming demands. In the light of 
this knowledge we can, by recasting slightly the meaning of the 
word demand, say that there are active demands (demands in 
the strict sense of the word) and potential demands (desires or 
wants) . 

Likewise, supply may mean one of three things. First, it 
may mean the supply of goods offered at the current price — • 
that is, the supply which owners are willing to furnish on the 
instant at the market price. Second, supply may mean, in 
addition to the amount supplied, goods that would be offered 
at higher prices. Third, it may mean goods not yet produced, 
owing either to a lack of time or to an unsatisfactory market 

54 



DEMAND, SUPPLY, AND PRICE 55 

price. When we speak, therefore, of demand and supply we 
ought to have clearly in mind the exact nature of each. Other- 
wise, we are almost sure to create confusion, and to acquire 
habits of loose thinking. 

It is apparent no doubt that neither demand nor supply 
works independently of the other; that there is a close mutual 
relationship. Any increase in demand, other things remaining 
equal, produces a change in supply; and conversely, ahy 
change in supply produces a change in demand. Professor 
Marshall has likened them to the two blades of a pair of shears, 
both of which are necessary if any cutting is to be done. It is 
also apparent from this analogy that supply and demand 
naturally tend to approach each other. , Increase in demand 
tends to raise price, and, consequently, causes an increase in 
supply. An increase in supply, on the other hand, tends to 
lower price, thus increasing the demand. 

Effect of demand and supply on price. — From what has just 
been said we may conclude that the price of any good is deter- 
mined by the demand for, and the supply of, that particular 
good. Generally speaking, such is the case ; but a few modifi- 
cations in the statement will lead to a more definite under- 
standing. Demand is used here as nothing more or less than 
the willingness and the ability of those who desire to possess 
the good, to pay the market price. Supply, as we have just 
seen, may mean one of several things. In this case it means the 
quantity of the particular good offered for sale, and does not 
include, as many think, the whole amount of such good in 
existence. In other words, the price is set not by desires for 
any good on the one hand, and the total supply of that good 
on the other ; but by demand (effective desire) and the volume 
freely offered to fill this demand. 

The effect of price on demand and supply. — Usually when 
the statement is made that price is determined by demand 



56 ELEMENTARY ECONOMICS 

and supply, the one making the statement does not reahze the 
full significance of the effect of prices on demand and supply. 
Let us assume, as is always the case, a given market price for 
some particular good on a given day. Producers who are 
selling their goods advantageously, and they are likely to pre- 
dominate, will exert themselves to increase the supply. An 
increased supply at the old price will not be taken. Conse- 
quently, sellers will reduce prices, thiereby increasing demand. 
Enough has been said to enable us to make several additional 
general statements of principles that underlie the relatio-n of the 
three notions — demand, supply, and price. (1) Demand and 
supply mutually affect each other through price. (2) Price is 
the immediate factor in the determination of the volume of demand 
or supply. 

13. Determination of Market Price 

Maximum and minimum prices. — When buyers and sellers 
come into a market, each buyer has in mind the maximum price 
he will pay for a good, while each seller, on his part, has deter- 
mined on a minimum price. Provided nothing occurs to change 
these determinations, no exchange will take place unless the 
maximum price of the buyer is equal to, or greater than, the 
minimum price of the seller. Here, then, is the most funda- 
mental notion in the determination of market price. 

In determining a maximum price the buyer estimates the 
marginal utility of the good he desires, measuring it by com- 
paring the satisfaction which this good will yield with the 
satisfaction yielded by some other good or goods of the same 
price. If he desire more than one unit of the good, the marginal 
utility will ordinarily be lower than if he desired but one unit. 
The seller's problem of determining a minimum price is a much 
simpler matter. Whereas the buyer's determination is largely 
an estimate, often, as we have seen, wholly disproportionate to 



DEMAND, SUPPLY, AND PRICE 57 

his wealth, the seller's determination is, except under extraor- 
dinary circumstances, fixed for him by the expense he has 
incurred in procuring the good. The prospective buyer of a 
suit of clothing, for example, can, at the best, have but a hazy 
notion of the maximum price he will pay for a particular suit. 
The merchant, on the other hand, knows almost exactly the 
minimum price he can accept for it without suffering a loss. 

Buyers' and sellers' surplus. — Assuming that the buyer's 
maximum price exceeds the seller's minimum price, we may 
conclude that an exchange will take place at some point between 
these extremes. If the exchange is for one unit of goods at 
or near the buyer's maximum price, it is readily seen that he 
will enjoy little or no consumers' surplus. If, however, the 
exchange is at or near the maximum price set by the buyer for 
each of several units he will, as we have seen, enjoy a consumers' 
surplus. The seller also enjoys a sellers' surplus, which we may 
define as the difference between his minimum price and the 
market price. Since market price is usually somewhere between 
the buyers' maximum and the sellers' minimum, each group 
enjoys a surplus, the size of which in a barter regime would be 
largely determined by the higgling ability of the parties to the 
trade. 

Four possible market conditions. — A market price may 
result from any one of four conditions : (1) One buyer and one 
seller, (2) one buyer and several sellers, (3) several buyers and 
one seller, and (4) several buyers and several sellers. 

The first of these, one buyer and one seller, is now of no great 
importance, though it characterized trade at an earlier day, 
when men lived far apart and exchanged goods with little 
reference to community demands. Occasionally even now 
exchanges are made in which there are but one buyer and one 
seller : the owner of a family heirloom, a stranger let us say, 
offers to sell the heirloom to the only remaining member of the 



58 ELEMENTARY ECONOMICS 

family. The determination of price in this case bears two char- 
acteristics not usually met. First, both the buyers' surplus 
and the sellers' surplus are likely to be exceptionally large. 
Second, the good exchanged is incapable of reproduction. 

Almost as rare under free competition are the cases where 
there are one buyer and several sellers. Frequently, however, 
some buying monopolist controls the market. While, as we 
shall see presently, he is restrained from pretending to have a 
ridiculously low maximum price, he can, and often does, as in 
the case of crude oil, iron ore, and leaf tobacco, enjoy an excessive 
buyers' surplus. Fortunately for the sellers, law and popular 
feeling frown on buyers' monopolies. 

Monopolistic also is the third condition, where there are 
several buyers and one seller, though usually, as under the 
second condition, the monopoly is not complete. Any one of 
the so-called trusts we may consider the single seller; the 
public, the several buyers. The Standard Oil Company, for 
example, while its monopoly is not complete, represents the 
single seller, while the users of gasoline, to name only one group 
of its customers, comprise the buyers. 

The fourth, and by far the most important condition under 
which a market price is established, is when there are several 
buyers and several sellers. Here we find each buyer with his 
own notion of a maximum price, and each seller knowing rather 
definitely his minimum price, which, as we have seen, is deter- 
mined by his expenses of production. Here too, we must 
assume competition to be free and active, and each buyer 
and seller to be desirous to drive the best bargain possible. 
With these assumptions in mind we can now turn our attention 
to the determination of market price under competitive con- 
ditions. 



DEMAND, SUPPLY, AND PRICE 59 

14. The Competitive Market Price 

Buyers' schedule. — To simplify matters, let us suppose that 
seven men, each desiring to purchase one bicycle, attend a 
bicycle auction where the goods offered for sale are alike in every 
respect, and where both buyers and sellers are permitted freely 

y 








Fig. 4. 



X 



to make offers. These seven buyers we will indicate by the 
letters A, B, C, D, E, F, G. To complete our supposition let 
us attach to each of the seven buyers the following maximum 
prices: A — 30, B — 28, C — 27, D — 24, E — 21, F — 16, 
G — 11. Clearly, the valuations differ widely, but that is 
exactly the situation under actual business conditions; for 
the valuations we have attached to these seven buyers rep- 
resent desires which may or may not become demands ; and 
we can know whether or not they become demands only when we 



60 ELEMENTARY ECONOMICS 

know the exact location of the market price. If, for example, 
the market price should be fixed at 25, D, E, F, and G would not 
have a demand for bicycles, for demand implies both the 
willingness and the ability to pay the market price. Obviously, 
then, we must next turn our attention to the sellers, who are 
equally as necessary as the buyers in fixing a market price. 

Sellers' schedule. — Each seller, as we have seen, has in 
mind a minimum price under which he cannot go without 
sustaining a loss. Accordingly, each of the sellers of bicycles — 
seven, let us say, with one bicycle each — who attends our 
assumed bicycle auction has settled on the lowest price he will 
take for his bicycle. As in the case of the buyers we can 
represent the sellers by letters, as R, S, T, U, V, W, Z. Also 
we can attach minimum prices to each of them as follows: 
R— 17, S— 18, T — 20, U — 23, V — 28, W — 31, Z — 40. 
In the preceding section it was noted that we could not deter- 
mine the number of bicycles demanded until the market price 
was fixed. A similar difficulty exists in the determination of 
the available supply, since, according to our assumption, 
those sellers whose minimum price exceeds the market price 
will withdraw their bicycles from the auction. Fig. 4 illustrates 
graphically the character of the various demands; Fig. 5 of 
the various supplies. 

Fixing the market price. — Before proceeding to determine 
just where the price would be fixed, it will simplify matters 
to eliminate those buyers and sellers who clearly have no chance 
to participate in the auction — that is, those buyers who cannot 
possibly have a demand and those sellers with minimum prices 
above the maximum price of the highest bidder among the 
buyers. Buyer G, whose maximum price is 11, cannot have a 
demand, for the lowest minimum price among the sellers is- 17. 
For the same reason, F must withdraw from the auction. 
Similarly, sellers W and Z must withdraw, for the minimum 



DEMAND, SUPPLY, AND PRICE 



61 



price of either exceeds the maximum price of any one of the 
buyers. There remain, then, five buyers and five sellers, who, 
so far as we have determined up to this point, will assist to fix 
the market price. We are now ready for the auction to open. 




X 



Fig. 5. 



Buyer A announces, let us say, that he will pay 30 for one 
bicycle. Immediately five sellers each offer him a bicycle at 
that price. Seeing that he may be able to get a better bargain 
by holding off, A refuses to buy. The sellers then begin to 
reduce their prices. When they drop to 28 a second buyer 
(B) comes into the market. We then have five sellers and two 
buyers. Prices will continue to fall. When they pass below 
28, V will drop out, leaving two buyers and four sellers. At 27 



62 



ELEMENTARY ECONOMICS 



a third buyer's desire becomes a demand. Then we have four 
sellers and three buyers. Clearly, no one of the four sellers 
would permit the downward movement of the price to stop at 
this point if it resulted in his making no sale, and that is 
exactly what would happen. One bicycle would remain unsold. 
At 26 the same condition remains ; so also at 25. Wlien 24 
is reached, however, a fourth buyer (D) cries out that he will 




Fig. 6. 



take a bicycle at that price. Now we are near the market 
price, which is likely to be found anywhere between 24 and 23, 
the exact point being determined largely by the ability of either 
group to bargain successfully. With the market price estab- 
lished between these two limits, 23 and 24, we find that three 



DEMAND, SUPPLY, AND PRICE 63 

of the seven buyers do not have a demand for bicycles, and that 
three of the seven sellers are unwilling to furnish any of the 
supply at that price. We find also that the market price is that 
which produces the greatest number of sales. 

To make the matter clearer let us bring Figs. 4 and 5 together 
in Fig. 6. Here we see that buyers A, B, C, and possibly D, 
have a buyers' surplus. A's surplus is represented by the verti- 
cal distance from A on the demand curve to the horizontal line 
marked PP'. Similarly, the surpluses of B, C, and D may be 
determined. To express the same thing mathematically, we 
say that the surplus of each buyer is the difference between his 
maximum price and the market price. Likewise, the surplus 
of any one of the sellers is the difference between his minimum 
price and the market price. 

In the above assumptions the simplest condition possible 
has been chosen, though the conclusion reached holds true for 
the most complex condition in fixing market price. It is con- 
ceivable, first of all, that any one of the buyers might have 
had a desire for more than one bicycle. If, for example, A had 
been willing not only to pay 30 for one but also to pay 29 for 
each of two, the market price would have been fixed between 
23 and 27 instead of between 23 and 24. Second, the three 
sellers who found the market price below their minimum prices 
might, in a moment of panic, have thrown their bicycles on the 
market at a sacrifice rather than to hold them. In this case 
the market price would have been fixed still lower. Third, 
under actual business conditions it is improbable that the 
bicycles would have been exactly alike. Such complexities, 
however, merely comphcate the fixing of market prices under 
free competition, and do not, as one might think at first glance, 
run contrary to the principle we have worked out under simpler 
conditions. 



64 ELEMENTARY ECONOMICS 

EXERCISES AND PROBLEMS 



1. What is meant by the expression "supply and price"? 

2. How is price affected by demand? by supply? 

3. How does price affect demand? supply? 

4. Why do sellers have minimum prices ? 

5.. How does each determine his minimum price? 

6. Why do buyers have maximum prices? 

7. How does each determine his maximum price? 

8. What are some of the different meanings of "market"? 

9. Does the supply of a commodity include what is in the hands of 
the consumer? 

10. Which buyers in a market cannot buy? 

IL Which sellers cannot sell? 

12. Why do many summer tourists like to go where no other tourists 
have gone? 

B 

1. Make a list of goods that advanced in price during the Great 
War and try to determine how these advances affected production. 

2. Attach maximum prices to five articles you have recently pur- 
chased. 

a. Compare these prices with the prices you paid. 

b. Determine your approximate consumers' surplus on each 

purchase. . 

c. Would a lower price have caused you to buy more of any 

article than you did buy? 

d. Did you feel the influence of other buyers? 

3. Give examples from your own experience or observation of the 
four possible market conditions. 

4. Mention the names of any articles you have seen sold at "cut 
prices." Discuss these sales under the following heads : 

a. Elasticity of demand. 

b. Competition among sellers. 

c. Competition among buyers. 

d. Seasonableness. 

5. How has your refusal to buy any article which was on sale affected 
the market price of that article? 



DEMAND, SUPPLY, AND PRICE 



65 



c 

1. During the winter of 1918-19, the statement was often made 
that the high wages per ton paid to miners during the preceding summer 
had tended to decrease rather than to increase the production of coal. 

a. Assuming this statement to be correct : 
i. Why were wages increased? 

ii. Why did not an increase in wages increase the coal output ? 
iii. Can we conclude that wages vary inversely with output? 
h. Assuming this statement to be incorrect : 
i. What caused it to be made? 
ii. Why did many people believe it to be true? 
iii. Why was it not refuted? 

2. Analyze the medieval notion that in every exchange of goods one 
of the parties to the exchange lost exactly what the other party gained. 

3. Explain how the market price of wheat would be determined 
under the follomng conditions : 

Amount Offered , 

10,000,000 bu $1.50 

8,000,000 bu. ... 
7,000,000 bu. . . . 
6,000,000 bu. ... 
3,000,000 bu. ... 
1,000,000 bu. . . . 



RICE 


Amount Demanded 


1.50 . . 


. . 3,000,000 bu. 


1.25 . . 


. . 4,000,000 bu. 


1.10 . . 


. . 5,000,000 bu. 


1.00 . . 


. . 6,000,000 bu. 


.80 . . 


. . 8,000,000 bu. 


.60 . . 


. . 10,000,000 bu. 



a. At what price will the greatest amount be bought and sold? 
h. What effect will the market price have on consumption of 
wheat? on future production of wheat? 

4. If competitive prices are determined by an equilibrium between 
demand and supply, how can a store maintain a "one-price system"? 

5. "The price of pork has never gone as high as $2 a pound nor as 
low as ten cents a barrel." 

a. Why are there any fluctuations in price? 

h. Why are the prices higher now (1919) than ten years before? 

c. Are there any conditions under which the price of pork might 

fluctuate as much as suggested by the above statement? 

d. What classes of people would buy pork if it were $2 a pound? 

What would other classes do? 



66 ELEMENTARY ECONOMICS 

6. Suppose at potato-digging time a gardener finds that the market 
price of potatoes is but twenty cents a bushel. 

a. What would be his attitude toward storing potatoes? 

b. If he stored his potatoes would he be a seller in the market ? 

Explain. 

c. Suppose he had no faciUties for storing : 

i. Would he dig his potatoes? Why, or why not? 
ii. Might he sell them undug? How? 

d. What would be his attitude toward the next crop of potatoes ? 

e. Suppose he turns his attention to wheat-raising : 

i. What would be the possible effect on the future price of 

potatoes? 
ii. How might the price of wheat be affected? 

SUPPLEMENTARY READING 

Bullock, Introduction to the Study of Economics, 3d ed., pages 192-222. 

Ely, Outlines of Economics, 3d ed., pages 164-182. 

Fetter, Economics, Vol. I, pages 61-72. 

Fisher, Elementary Principles of Economics, pages 268-353. 

Johnson, Introduction to Economics, pages 36-42. 

Seager, Principles of Economics, pages 109-122. 

Seligman, Principles of Economics, 5th ed., pages 222-238. 

Taussig, Principles of Economics, 2d ed., Vol. I, pages 138-158. 



CHAPTER VI 
SOME PRACTICAL ASPECTS OF CONSUMPTION 

15. Harmful Consumption 

Consumption from the standpoint of economics. — Strictly 
speaking, the student of economics, as such, must confine his 
attention to demands for goods, however much as an individual 
he may deplore the manner in which many goods are produced 
and the evil results which their consumption often entails. 
A suit of clothing made in a sweatshop fills the same need as a 
similar one turned out from the most up-to-date manufacturing 
plant. Both are produced, both are distributed in the form of 
money among those who assist in production, both are con- 
sumed. Likewise, a box of cigars is just as much an object of 
economic inquiry as is a sack of flour, though society would be 
greatly profited by an increase in the one and a decrease in the 
other. But just as long as there is a demand for cigars, the 
student of economic questions must include them in his in- 
vestigation. This does not mean, however, that we should 
ignore the effects of the production or consumption of any 
particular good. Rather does it mean that we should study 
every economic demand irrespective of its evil results and every 
effort that is put forth to supply this demand. 

Nature of harmful consumption. — It is impossible, we may 
as well say at the outset, to draw a line through consumption, 
marking off, on the one side, the satisfactions of desires that 
bring nothing but an increased welfare both individual and 
social, and on the other, the satisfactions that produce the 

67 



\ 



68 ELEMENTARY ECONOMICS 

opposite effect. Every one will agree that bread contributes to 
our well-being, and that opium does not. Yet in a complete 
classification of goods there comes a time when disagreement 
will appear, when even learned and unbiased authorities will 
differ. The best we can do under these circumstances, there- 
fore, is to weigh the facts in each case, both as individuals and 
in small social groups, hoping thereby to arrive at the truth. 

It is obvious that a considerable portion of human con- 
sumption is unwise and even actually harmful. Intemperance 
abounds not alone in the consumption of such positively harm- 
ful goods as drugs and intoxicating liquors. Its baneful in- 
fluence extends even to the use of food, of clothing, and of enter- 
tainment. Few people would now deny that the use of drugs or 
intoxicating liquors is detrimental, as well to the best interests 
of society as to the individual. The opinion once generally held 
that alcohol increased and sustained mental and physical energy 
has been discarded. Unfortunately, the great majority stop at 
that point in their opposition to intemperance, forgetting that 
it is also harmful to consume intemperately other economic 
goods. The typical American is much more likely to be overfed 
than underfed. The more frugal Europeans often marvel at our 
capacity for food, while many a physician can testify that his 
practice consists largely in doctoring the ailments that arise 
from overeating. Such consumption, we may safely say, is 
harmful as well as unwise. Also in the matter of dress many 
of us, perhaps a majority, protect our bodies with more care 
than nature demands, thereby lowering the physical vitality, 
instead of raising it. Entertainment, too, may be carried to an 
extreme, particularly that kind which consists of late hours, 
undue excitement, or inactivity. 

Consumption and efficiency. — It will readily be seen that con- 
sumption is an important factor in efficiency. Large industries 
clearly recognize this fact; hence their insistence on sobriety 



SOME PRACTICAL ASPECTS OF CONSUMPTION 69 

among their employees. The manager of many a large indus- 
trial plant views the week-end with horror, knowing from expe- 
rience that his force will be depleted on Monday by Sunday's 
carousals. The effects of these excesses are too obvious to 
merit discussion. Other excesses, however, not so easily dis- 
cerned, or if discerned allowed to go unchallenged, have a 
similar influence on the industrial efficiency of society. Office 
workers, students, and all others that follow a sedentary life, 
often fail to work as efficiently as they might if they took more 
exercise and ate less food. Who has not experienced the languor 
that comes so frequently just after the noonday meal? the 
fine feeling of bodily and mental energy that comes with an 
empty stomach? Efficiency is increased also by keeping the 
temperature of the body normal. Overheated rooms, which 
means an overconsumption of fuel, and garments too thick 
and heavy for the occasion, produce depression in mind and 
body, thereby lessening normal efficiency. 

From what has been said it is apparent that society is in- 
terested in the consumption of its members ■ — that is, that it 
is not altogether an individual matter what one eats, or drinks, 
or wears. Already steps have been taken to discourage the use 
of intoxicating liquors, not alone because it is felt that their 
use is more or less immoral, but also because it has been proved 
beyond dispute that alcohol and industrial efficiency do not 
mix. Further than this, society has not yet attempted to go. 
Consequently it is the business of each one of us to keep fit 
mentally and physically by relieving the mind and body of over- 
work in combating intemperance of every sort. 

16. Unwise Consumption 

The meaning of economical consumption. — Another type of 
consumption, which in itself is not positively harmful to the 
body or mind, we may designate as unwise consumption. 



70 ELEMENTARY ECONOMICS 

Whenever either of two goods is capable of satisfying a want, 
obviously, the use of the one which involves the greater labor to 
procure is unwise. The early colonists, and later the frontiers- 
men in the West, found it necessary to substitute corn for wheat 
as a material for making bread. They preferred wheat bread, 
but their good sense soon taught them the advantages of eating 
corn bread instead. Here is an example of economical con- 
sumption. It was economical for the simple reason that corn 
was easier to grow than wheat. Some of the early settlers, 
however, went to great extremes in an effort to satisfy tastes 
which they had acquired in Europe, and which could be satisfied 
only in old settled countries. They planted vineyards, from 
which they expected to get, in a short time, a supply of wine 
sufficient for their needs. Almost without exception their 
expectations were not realized. Consequently, they turned to 
apple cider and corn whisky, both of which were easily produced 
on the frontier. Modern business conditions tend to lessen the 
differences in value between two goods equally serviceable, 
yet even today there is need to compare the disadvantages 
arising from the higher price of one good with the disadvantages 
one may feel in having to adjust his taste to another good more 
easily procured. 

The gospel of plain living. — Closely related to economical 
consumption is plain living. At the very outset we must rob 
our minds of any feeling that plain living is something mean or 
contemptible, or that it is associated with poverty or want. 
On the contrary, plain living is the real basis of industrial 
efficiency, of education, of culture, and of happiness. It begets 
contentment of mind, adds to physical energy, and prolongs 
life. We find it associated with achievement in every line of 
endeavor. In fact, an old philosophy made plain living and high 
thinking the only sure corner stones on which a successful 
life could be built. 



SOME PRACTICAL ASPECTS OF CONSUMPTION 71 

The most superficial observation of American living con- 
ditions reveals, not only a remarkable degree of poor taste in 
consumption, but also poor judgment as to the relative merits of 
similar goods. Otherwise there would not be the widespread 
demand for the study of home economics. Everywhere serious- 
minded men and women are coming to realize that incomes are 
not being spent to the best advantage, that they are virtually 
being thrown away, too often through ignorance, in buying goods 
that satisfy the most transitory demands. 

Social unrest. — Unwise consumption is one of the several 
causes of the social unrest which has manifested itself in this 
country during the past generation. The consuming standards 
of most individuals are set to some degree by neighbors and 
friends. In a democracy, such as ours, where every one feels 
that he is equal to every one else, there is always the temptation 
to display equality through the consumption of goods. Conse- 
quently, many people live beyond their income in a fruitless 
endeavor, as they say, to keep up appearances. The result is 
debt, worry, and discontentment. Debt keeps out of their 
reach business opportunities which they might easily have 
grasped had they lived within their means. Worry destroys 
efficiency, while discontentment causes them to overlook the 
small things which would in time lead to something better. 
Here, then, is an important source of social unrest, which we 
can counteract and finally eliminate by having a proper regard 
for economic values. 

It would be misleading to close this discussion without saying 
something more about the sources of social unrest. The 
rapid increase in the number of wealthy men, the display of 
lavish expenditures on every hand, and the concentration of 
industry, lead many to believe that American industrial 
society needs to be reconstructed in some way so as to equalize 
more evenly the distribution of wealth and to place in the hands 



72 . ELEMENTARY ECONOMICS 

of the workers greater control over production. Further dis- 
cussion along these lines, however, must be deferred to later 
chapters. 

17. Conservation and Thrift 

The sin of waste. — Americans are proverbially the greatest 
wasters the world ever saw. It is a common expression among 
European travelers in this country that a frugal French house- 
wife could easily feed her family with the food wasted in a well- 
to-do American home. Granting the extravagances of such a 
statement, the significant fact remains that only a relatively 
few of us are normally thrifty. Not only in food, which may be 
wasted by overeating as well as by throwing it in the garbage 
barrel, but also in clothing, in house furnishings, and in a 
variety of different ways, we fail to get maximum satisfaction 
from our consumption. The broken pieces of bread, left-over 
vegetables, and bits of meat, which are too often thrown away, 
might very well, if sensibly and properly prepared, serve as the 
basis of another meal. Likewise, the overcoat, discarded after 
a season's wear, or the shoes thrown away simply because they 
need a *new pair of soles, represent waste which might otherwise 
be utilized to the advantage of society as well as of the in- 
dividual. 

Any discussion of waste must necessarily involve two con- 
flicting viewpoints : that of society, which suffers a loss ; and 
that of those individuals who reap a profit from waste. Clearly, 
the cattle-raiser, as such, is profited by the waste of meat. The 
manufacturers and retailers of men's clothing likewise profit 
by a waste of hats, overcoats, and furnishings. Not one of 
these men perhaps would openly encourage waste of any sort, 
and it is only fair to them to say that they see no waste when the 
goods they themselves sell are concerned. Society, however, 
must view the whole field and not a particular industry, 



SOME PRACTICAL ASPECTS OF CONSUMPTION 73 

though this view should be detrimental to individual enter- 
prises. The country as a whole experienced during the first year 
of our war with the Central Powers this conflict between indi- 
vidual and^social aims in the matter of waste. The government 
called for millions of men and billions of dollars which could be 
supplied only from the non-war industries. The answer was 
" business as usual," which from the social point of view was 
impossible. Individual business men set up claims that the 
ends of war could be furthered by buying their goods. Finally, 
such claims became absurd. Even florists in some sections 
adopted the slog'an, " give flowers and win the war," while 
theatrical managers everywhere insisted that the morale of the 
people demanded an increased attendance at vaudeville and 
motion-picture shows. 

The twofold aspect of thrift. — The practice of thrift may 
result in a twofold benefit. First, the individual is sure to profit 
if he does not permit his thrift to degenerate into parsimony. 
The very spirit of wholesome saving stimulates sobriety, tem- 
perance, efficiency, and contentment. It creates a feeling of 
independence, tends to guard against accidental reverses, and 
provides for old age. Not less important, it makes the saver a 
better citizen, giving him an interest in society and government 
which he cannot have if he spends every dollar as it comes in. 
It is a well-known fact that a city of home-owners is likely to be 
a city of enterprise, of good government, and of good schools 
and churches. Back of all this lies the willingness of the in- 
dividual to save. Second, society is also the gainer in the long 
run, though individual producers would feel the pinch of a 
decreased demand for their goods. But even they in time would 
as a class adjust themselves to the new condition. Society 
would, if thrift prevailed, possess not only more efficient and 
more contented members, but also a greater supply of wealth 
to be used in productive enterprises. No real sacrifice, it 



74 ELEMENTARY ECONOMICS 

must be said, is involved, either from an individual or a social 
standpoint, in an increase of thrift. It makes no demand that 
the individual shall forego any necessity or even comfort. 
It does, however, stand for sensible consumption, for a judicious 
comparison of values, and for the elimination of waste. 

Some avenues for saving. — Thrift, we have every reason 
to expect, would be stimulated by a better understanding of the 
avenues through which savings can be made. The most out- 
standing institution in this respect is the savings bank, which 
readily accepts small amounts, paying depositors a reasonable 
rate of interest, usually in the neighborhood of three or four per 
cent. Even the national government has entered this field 
with its postal savings bank system. A much higher rate of 
interest can be got from stock in building and loan associations. 
Unlike deposits in savings banks, which can be made in any 
amount at any time, building and loan dues are payable at 
stated times in stated amounts. This very characteristic, the 
definiteness in time and amount, though it is galling to many 
people, works effectively to create habits of thrift and saving. 
What at first appears to be a burden, soon, by the very force of 
habit, becomes a fixed charge against income, which is handled 
exactly like rent or regular store bills. Small accumulations 
like these are first steps to larger investments. Periodically 
the savings bank depositor or the owner of building and loan 
shares is able to buy government or industrial bonds or even 
real estate mortgages. The interest from these larger invest- 
ments becomes the nucleus of further savings, which in time 
ripen, as it were, into more bonds or mortgages. Thus, the 
process goes on until in time many a man finds himself in 
possession of a greater income from his savings than he can 
possibly get from his labor. The hardest part of saving, as any 
successful man will testify, is the beginning. A dollar appears 
too insignificant to be saved. Besides, there are so many things 



SOME PRACTICAL ASPECTS OF CONSUMPTION 75 

its possessor feels that he ought to buy. But with foresight and 
a spirit of abstinence the typical American can save. 

As a practical problem saving seldom appeals to young people 
of high school and college age. Yet of all classes they ought to 



Investment 




. 




Investment 


Inter- 
est in 
Five 
Years 








Investment 


Interest in 
Ten Years 






. 


Investment 


Interest in 
Fifteen Years 








Investment 


Interest in Twenty Years 






Investment 


Interest in Twenty-five Years 





Growth of an Investment Compounded Annually at Six Per Cent. 

acquire the habit, for a dollar saved at twenty is worth several 
dollars saved at forty. Early savings mean an early start in 
business, early home-owning, and early independence. A first- 
year high school boy who can begin to put five dollars a month 
into a building and loan association will, in the middle of his 
junior year in college, find himself in possession of five hundred 
dollars. Likewise the high school graduate who is about to take 
his first step into the business world can, by investing ten dollars 
a month in the same way, have a thousand dollars at the age of 
twenty-five. The saving problem becomes easy, to repeat what 
has already been said, after the first step has been taken. 



76 ELEMENTARY ECONOMICS 

Report of the Peoples Building and Loan Association, 
April 1, 1919 

Assets 

Loans on Real Estate \ $418 100 00 
Loans on Stock Pledged / 

Interest due and unpaid 475.06 

Fines due and unpaid 96.90 

Installments due and unpaid 837.00 

Real Estate 4,197.97 

Judgments or Master's Certificates .... 6,445.07 

Real Estate Sold on Contracts 1,231.00 

Taxes advanced 174.89 

Insurance advanced 19.08 

Furniture and Stationery 400.00 

Cash in hands of Treasurer 102.66 

Cash in hands of Secretary 176.90 

$432,256.53 

Receipts 

Cash in Treasury $233.25 

Cash in hands of Secretary 24.44 

Installments received 108,909.75 

Interest received 31,884.52 

Membership Fees received 77.00 

Transfer Fees received 17.50 

Fines received 478.50 

Pass Book Fees received 45.00 

Loans repaid or matured 103,600.00 

Taxes repaid 408.49 

Insurance Premiums repaid 67.70 

Real Estate 242.00 

Judgments 1,612.73 

Real Estate sold on Contract 316.75 

Contingent Fund 268.00 

Installment Suspense 28.75 

Expense Fees 447.72 

Accounts payable 158,900.00 

$407,562.10 



SOME PRACTICAL ASPECTS OF CONSUMPTION 77 

Report of the Peoples Building and Loan Association, 
April 1, 1919 

Liabilities 

Installments paid in , .. . $299,829.00 

Installments paid in advance 185.00 

Installments due and unpaid 837.00 

Interest paid in advance 15.77 

Interest 1,857.78 

Profit (divided) 50,184.93 

Profit (undivided) .30 

Installment Suspense 28.75 

Accounts payable 76,050.00 

Contingent Fund 3,268.00 

$432,256.53 



Disbursements 

Loans on Real Estate \ $ 93 000 00 
Loans on Stock Pledged / 

Installments on Stk. withdrawn and matured 104,650.75 

Interest or Profit on Stock withdrawn . . . 25,582.67 

Real Estate 254.14 

Judgments or Master's Certificates . . . 5,135.95 

Taxes advanced 86.74 

Insurance advanced 58.38 

Accounts payable 170,800.00 

Interest 5,454.88 

Expenses — general 408.92 

Expenses — salaries 1,500.00 

Stationery, postage, and printing .... 82.09 

Cash in hands of Treasurer 102.66 

Cash in hands of Secretary 176.90 

Miscellaneous Disbursements 268.02 

$407,562.10 



78 



ELEMENTARY ECONOMICS 



Table of Values and Shares 



Series 


Dues Paid 


Profits 


Value Per Share 


25-A 


$72.00 


$18.40 


$90.40 


26-A 


60.00 


' 12.78 


72.78 


27-A 


48.00 


8.18 


56.18 


28-A 


36.00 


4.60 


40.60 


29-A 


30.00 


3.20 


33.20 


30-A 


24.00 


2.04 


26.04 


31-A 


18.00 


1.15 


19.15 


32-A 


12.00 


.51 


12.51 


33-A 


6.00 


.13 


6.13 


1-B 


15.00 


1.60 


16.60 


2-B 


12.00 


1.02 


13.02 


3-B 


9.00 


.57 


9.57 


4-B 


6.00 


.26 


6.26 


5-B 


3.00 


.06 


3.06 



18. Substitution 

Force of habit in consumption. — Very naturally one of the 
first points where thrift begins is the substitution of one good 
for another. Strongly opposed, however, to substitution — 
or to any other change — is the force of habit. All of us con- 
sume goods daily without giving second thought to the needs 
we feel, or to the satisfaction we secure. It is true that if such 
goods were entirely removed we should feel their absence and 
even complain of privation. Yet if some other good of like 
appearance were substituted we should not, in many cases, 
detect the deception. People become accustomed to use, for 
example, creamery butter, lard, pure apple cider, leather shoes, 
or solid silverware, and feel that nothing else could serve so 
well the purpose to which these goods are put. The basis for 
these wants goes scarcely deeper than taste or looks, for seldom 
if ever do we stop to analyze the satisfaction of deeper wants, 
such as cleanliness, comfort, or good health. 



SOME PRACTICAL ASPECTS OF CONSUMPTION 79 

Extent of substitution. — The rise in prices which began 
about 1896 and which was accelerated by the Great War 
naturally turned the attention of both producers and consumers 
to the question of substitutes. The result has been that many 
goods have been compelled to compete with substitutes. At 
times the battle between the two has become intense. Butter 
and oleomargarine, for example, have contested for supremacy, 
the producers of each basing their claims for preference on 
uniformity in texture, cleanliness, and nutrition. In support 
of what was said in the preceding paragraph, the fact may be 
cited that tons of the latter have been consumed by hotel and 
restaurant patrons who, if they were questioned in the matter, 
would have declared ,their inability to eat any substitute for 
butter. Substitutes have been found for many other foods, such 
as wheat bread, ohve oil, maple sirup, and eggs. Likewise, 
substitutes for numerous other kinds of goods have been 
discovered, until one scarcely knows just when he is buying 
leather, silk, cloth, furs, paints, or oils. 

Merit in substitution. — The first feeling toward substitution 
is that it is more or less of a fraud, and that no substitute can 
possibly possess the merits possessed by the good it attempts to 
displace. Obviously, no such sweeping conclusion can be justly 
drawn, for until a careful comparison of the utilities yielded 
by two competing goods is made, no one can say which is the 
better either from the individual or from the social standpoint. 
We can conclude, however, that as between the two, all other 
things being equal, the cheaper is preferred. 



80 ELEMENTARY ECONOMICS 

EXERCISES AND PROBLEMS 

A 

1. What is the economic viewpoint of consumption? 

2. How does this viewpoint differ from the ethical viewpoint? 

3. How is consumption related to industrial efficiency? 

4. Distinguish between unwise consumption and harmful consump- 
tion. 

5. What are some of the motives that lead to unwise consumption? 
harmful consumption? 

6. Why does the saving problem become easy after the first step? 

7. How does substitution encourage tlirift? 

8. Distinguish between the social and the individual viewpoint of 
waste. 

9. What is the relation between plain living and high thinking? 

B 

1. Make a list of ten articles the consumption of which is harmful. 
fl. Would each be harmful at all times? 

b. Would each be harmful to all persons at any time? 

c. Which, if any, become harmful only with excessive con- 

sumption? 

d. Would everybody agree with your list? 

2. Mention ten instances of waste that have come under your 
observation. 

a. How many of the ten were conscious wastes? How many 

unconscious? 

b. How could these wastes have been avoided? 

c. Were any of these wastes beneficial to any individual? 

Whom? 

d. Were any of them beneficial to society? Explain. 

3. Suppose you begin now to save ten dollars a month, investing 
it in building and loan stock at seven per cent. 

o. In how many years would your stock be worth $1000? 

b. How could you invest this amount to an advantage? 

c. How many times could you repeat this operation before you 

are fifty years of age? 



SOME PRACTICAL ASPECTS OF CONSUMPTION 81 

d. What would then be the total value of your investment? 

e. Is this amount more or less than the total wealth of the average 

well-to-do individual at that age? 
4. Make a list of food substitutions. 

a. Why are these substitutions consumed? 

b. Which are less palatable than the foods for which they are 

substituted? 

c. Is there any popular prejudice against any of these sub- 

stitutes? 

d. How, if at all, is this prejudice being destroyed? 

C 

1. In discussions of the liquor business, what is the essential differ- 
ence between temperance and prohibition? How could an individual 
support one without supporting the other? Which of the two is more 
intimately connected with government regulation? with moral educa- 
tion? 

2. A few years ago a large manufacturing concern established its 
pay days on Wednesdays. Shortly afterward it changed back to 
Saturdays. Give reasons for the last change. 

3. A farmer usually consumes much more food than a man living 
in the city. Does this mean that the farmer is overeating or that the 
city man is undereating? How, then, shall we determine how much 
food is sufficient for any individual? 

4. "Americans grumble at the high cost of living. If they would 
look about they would see that a much greater evil is the cost of high 
living." 

a. Has there been an increase in the cost of living? 

h. What is meant by the expression "cost of high living"? 

c. Is there any relation between the two? 

5. "Americans are notorious spendthrifts. European shopkeepers 
have three prices for their goods : one for their native customers in 
moderate circumstances ; another for native millionaires ; and the 
highest for American tourists." 

a. Why is the typical American liberal with his money? 

b. What is the general notion about one who spends his money 

with care? 

c. Account for the prevalence of the tipping habit in this country. 



82 ELEMENTARY ECONOMICS 



SUPPLEMENTARY READING 

Bullock, Introduction to the Study of Economics, 3d ed., pages 107-113. 
Ely, Outlines of Economics, 3d ed., pages 122, 123, 497-500. 
Fetter, Economics, Vol. I, pages 285-299. 
Johnson, Introduction to Economics, pages 197-199. 
Seager, Principles of Economics, pages 83, 316-321. 
Taussig, Principles of Economics, 2d ed.. Vol. I, pages 90-92, Vol. II, 
pages 16-21. 



PART III 

PROBLEMS OF PRODUCTION 



CHAPTER VII 
ORGANIZATION OF INDUSTRY 

19. Historical Background 

The domestic system. — Until less than two hundred years 
ago practically all of the productive processes were carried 
on in the homes, either by hand or with the aid of crude tools 
and machinery which showed little improvement over those 
employed in the Middle Ages. Weaving, the chief manufactur- 
ing industry in England at that time, was done by men, like 
Silas Marner, who gave it their entire attention, or by the 
peasant farmers and their families, who combined weaving 
with agriculture. At one time the typical weaver bought his 
thread in the market and there he also disposed of his cloth. 
Later, so-called capitalists furnished thread to weavers and 
paid them for their labor, sometimes even supplying them with 
looms. Gradually, then, there began to emerge, in addition to 
the independent weavers, two classes of producers : one owned 
a portion or all of the capital invested ; the other class did the 
weaving. Iron-smelting, machine-making, the manufacture of 
shoes, clothing, and hats, and practically every other form of 
production was carried on in a similar manner. The important 
thing to notice in this connection is the rise of a capitalist class 
which undertook to supply workmen with raw materials and 
machines and to dispose of the finished product. 

The English industrial revolution. — Beginning about 1760, 
with the invention of improved spinning and weaving machines 

85 



86 ELEMENTARY ECONOMICS 

and with the successful apphcation of steam to machinery, 
Enghsh industry soon underwent radical changes. Home 
manufactures gave way to the factory system with its hum and 
noise, its long and steady hours, its discipline, and its deadening 
influence. The old-type capitalists became owners. The 
independent weavers and spinners became operatives, being 
compelled as a result of the change to leave their little plots 
of land with their gardens, poultry, and hogs, and to crowd 
about the factories in poorly built hovels. A similar change took 
place in all other lines of manufacturing. Workers gave up 
their tools and machines, and whatever hereditary rights they 
had in the land, thus cutting themselves off from a great deal 
of their traditional independence. 

The American industrial revolution. — Fifty years later (1810) 
the American industrial revolution was under way. Samuel 
Slater, twenty years before, had introduced the factory system 
into the United States. The repressive commercial measures of 
Great Britain in her Orders in Council (1806 and 1807) and the 
edicts of Napoleon (1806 and 1807) had turned enormous quan- 
tities of American capital and thousands of laborers from com- 
merce and agriculture to manufactures. Our own Embargo 
Act (1807) and Non-Intercourse Act (1809) had practically 
completed what the two great European powers had begun — 
the industrial isolation of the United States. The three years' 
war with Great Britain (1812-1814) further encouraged manu- 
factures by providing them a government market. Thus, by 
1816, when the first tariff law for the protection of American 
manufacturers was enacted, the American industrial revolution 
was an established fact. In comparing these two great indus- 
trial revolutions, it must be kept clearly in mind that the one 
in England was characterized by a change from home to factory 
methods, while the one in the United States was characterized 
by a change from commerce and agriculture to manufacturing. 



ORGANIZATION OF INDUSTRY 87 

Later developments in manufactures. — Both in England and 
in the United States the factory system spread until in time it 
characterized all forms of production. Home manufacture in 
either of these countries at the present time is a rarity. Practi- 
cally every manufactured good we consume comes from some 
factory. Along with the factory system went the development 
of division of labor. From the first simple English weaving 
mills in which each operative carried on all the processes from 
the thread to the finished cloth, we have finally arrived at 
the place where each operative devotes himself to one specific, 
simple task. Consequently, he becomes a specialist in a short 
time. Our chief concern in this connection is to remember that 
the growth and spread of the factory system has been largely 
responsible for important changes in business organization. 

Railroad development. — Railroads, like manufactures, have 
undergone important changes since the first line in the United 
States was opened for business in 1830. Originally projected 
as local enterprises with local capital, they gradually became 
national in character and in service. Further consolidation 
and extension transformed them into great, through trunk lines, 
each line embracing thousands of miles and employing tens of 
thousands of workmen. Here again our chief interest lies in 
the fact that these developments have shaped, to a large extent, 
our methods and forms of business organization. 

Developments in American agriculture. — Unlike manu- 
factures and transportation, agriculture has undergone no 
radical changes in the matter of organization. Now, as has 
been the case for centuries, the typical farmer operates a single 
farm largely with his own labor and that of his family. He 
assumes all the business risks and enjoys all the profits. There 
have, however, been three developments in our agriculture 
which we must notice at this point. First, farmers produce 
more for the markets than they formerly did, selling their 



88 ELEMENTARY ECONOMICS 

products for money and buying goods which their predecessors 
had produced on the land and in the home. Along with this 
change has gone a growth of specialized farming in which each 
farmer concentrates on a few crops. Second, the invention 
and improvement of farm machinery has set free multitudes of 
laborers for other industries. Third, there has been a significant 
increase in the number of farm operators known as tenants, who, 
as the term signifies, do not own the land they operate. 

20. The Single Enterpriser and the Partnership 

Place of the single enterpriser in production. — The organi- 
zation of a productive industry may take any one of three 
different forms : the single enterpriser, the partnership, the 
corporation. Each possesses advantages as well as disadvan- 
tages. Usually one of the three is better adapted than either 
of the others to this or to that industry, depending on its 
size, on the nature of its product, or on the character of its 
operations. We cannot say, therefore, which form of organi- 
zation is best adapted to any particular industry until we know 
something about its character. We can, however, without 
special reference to particular industries, point out the advan- 
tages and disadvantages of each form of organization and 
draw general conclusions as to their adaptability. 

The single-enterprise form of industry predominates in most 
lines of production. It has almost a complete monopoly in 
farming, it is the form most often met in retailing, and it still 
holds an important place in manufactures. Wherever small 
capital is sufficient and close supervision is required, we may 
expect to find a single enterpriser, who assumes all the risks of 
the business and enjoys all of its profits. Obviously, he controls 
his business alone and without interference. He can decide 
on policies and carry them out without consulting others. 
Thus, we can see why farming, retailing, and even manufacturing 



ORGANIZATION OF INDUSTRY 89 

are adapted to the single-enterprise form of organization. Few 
farmers would care to share the cultivation of a piece of land 
with others. Neither does the druggist, the grocer, or the 
confectioner ordinarily feel the need of dividing responsibiUty 
or profits ^vith some one else. 

Advantages and disadvantages of the partnership. — A part- 
nership, to be brief, is nothing more than a mutual agreement 
between two or more individuals to undertake an enterprise. 
In business such an agreement is usually confined to production. 
Compared with the single enterpriser the partnership is at a 
disadvantage in the matter of business policy and authority. 
Unlike a single enterpriser, the member of a partnership must 
share more or less authority with others. Consequently, as 
often happens, the partners work at cross purposes, one advo- 
cating one business policy, a second advocating a different 
poHcy, while a third partner may disagree with both policies. 
Oftentimes, under such circumstances, it is found desirable to 
dissolve the partnership, it being necessary for the parties 
to agree mutually on some plan of dissolution. Profits, which 
the single enterpriser enjoys alone, must be divided among the 
partners. This division is made on the basis set forth in 
the agreements which partners usually makewhen the partner- 
ship is formed. 

The mere fact that authority and profits must be divided 
among partners is not in any way indicative that partnerships 
are not necessary and profitable. We can easily imagine a 
situation where men desire to share authority with others, and 
where the profits going to each partner exceed what any one 
of them could possibly make in the same business. The old 
adage that "two heads are better than one " applies very well 
to the typical partnership. In the retail business, for example, 
one partner may possess special skill as a buyer of goods, 
another may be an exceptionally good organizer of hired help, 



90 ELEMENTARY ECONOMICS 

while a third may have marked abihty in handhng the finances 
of the business. Sometimes one partner merely furnishes the 
capital, taking no active part in the direction of affairs. Such a 
one is usually called a " silent partner." We may conclude, 
then, that a partnership offers advantages in at least two ways. 
First, it permits men possessing different kinds of abilities to 
unite, thereby increasing efficiency. Second, it makes possible 
the employment of larger capital, which, as we shall see later, 
contributes to increased production. 

21. The Corporate Form of Organization 

Nature of the corporation. — The corporation was the last 
of the three forms of organization to develop ; and it developed 
only when single enterprisers and partnerships found that they 
could not, usually on account of insufficient capital, carry on 
certain kinds of industry to the best advantage. The govern- 
ment then stepped in and created artificial persons, which we 
know as corporations. The corporation, while it possesses 
many characteristics of a natural person, such as the ability to 
make contracts and to sue in the courts, has certain distinctive 
characteristics of its own. Its life is either limited to a specific 
number of years, or it is definitely unlimited, there being no 
uncertainty as in the case of a natural person. Its business 
operations are restricted to the purposes for which it was 
organized, and these purposes are stated specifically in its 
charter. Ordinarily, the manner in which it carries on its 
business, such as its methods of bookkeeping, is subject to 
more or less regulation by the government. The owners of a 
corporation are known as stockholders, who regularly elect a 
small number of directors from their ranks to manage the busi- 
ness. The directors in turn elect the president, secretary, 
treasurer, and other officers, to whom they usually delegate the 
actual management of affairs. 



ORGANIZATION OF INDUSTRY 



91 



Advantages and disadvantages of the corporate form of 
organization. — The corporate form of organization has an 
advantage over its two rivals in at least three respects : (1) 
it diffuses financial responsibility, (2) it survives the death 
of its owners, and (3) it permits of larger accumulations of 




/iSflX 




HARDWARE 


1 1 


a^HKS 




CLEEK3 



CU..H. 




GOODS 


1 




1 


CLERKS 


CIERKS 



F^ 



ORGANIZATION 

OF A 

RETAIL HARDWARE 
SYCW- 

^illustrative] 



capital. A single enterpriser, as we have seen, must assume 
all of the financial risks of his business. Likewise, in a part- 
nership each partner is financially liable for the entire in- 
debtedness of the partnership. For that reason few persons, 



92 ELEMENTARY ECONOMICS 

unless they can assist directly in managing its affairs, care 
to assume the financial responsibilities which a partnership 
imposes. In a corporation, however, the situation is different. 
There each stockholder is ordinarily liable only for the stock 
he owns ; that is, he cannot be held for the debts of the cor- 
poration. In other words, his liability to loss is confined to 
the investment he has already made. Moreover, the death of a 
stocldiolder does not, as in the partnership, dissolve the organi- 
zation of which he is part owner. Consequently, many men 
who could not or would not become either single enterprisers 
or partners are easily persuaded to become stockholders in 
corporations. The result is the much larger accumulation of 
capital than otherwise would be possible. 

Stockholders and bondholders. — Strictly speaking, stock- 
holders are enterprisers ; that is, they are the individuals who 
assume the tisks of business and enjoy the profits of their 
enterprise. In other words, they are the owners. The ev- 
idence of ownership in any corporation is the stock certificate, 
which bears on its face three important facts : (1) name of the 
owner, (2) number of shares, (3) par value of each share. Many 
corporations issue two kinds of stock, preferred and common. 
Preferred stock bears a definite dividend rate, which, so far as 
the corporation may be able, is guaranteed. It may also carry 
a preference in voting or in the division of assets, should the 
corporation decide to liquidate. Common stock, on the other 
hand, yields its owner dividends only after dividends have 
been paid on the preferred stock. To state the same fact in 
another way, the owners of common stock get all the profits over 
and above the amount necessary to pay dividends on preferred 
stock. Here we find the explanation for the wide variation in 
the value of many common stocks. When a corporation is 
merely able to pay its preferred dividends the value of its 
common stock ordinarily drops very low. When, on the 



ORGANIZATION OF INDUSTRY . 93 

other hand, the same corporation is exceedingly prosperous the 
same common stocks rise in value, often selling for more than 
preferred stocks. If, to illustrate the case, a corporation which 
has equal amounts of preferred and common stocks should earn 
but seven per cent, which is a normal rate, on its entire capitali- 
zation, it is likely that its common stock would sell in the neigh- 
borhood of par. If, however, the same corporation should earn 
twenty per cent instead of seven, the common stock would 
command a high price, say 400. 

Thus far in our discussion of corporations we have assumed 
that the stockholders alone furnish all the capital required. 
In practice, however, corporations, like single enterprisers and 
partnerships, usually find it necessary to secure funds from out- 
side sources. The two last named secure their funds on prom- 
issory notes ; the first, on bonds. These bonds are similar to 
real estate mortgages in that property in each case is the basis 
of security, and like mortgages they are evidences of indebted- 
ness. Bonds bear a definite rate of interest, and do not entitle 
holders to share in any extra prosperity the corporation might 
enjoy. Consequently, fluctuations in the value of bonds are 
much less than they are in the case of stocks. Of the two forms 
of investment, bonds are less speculative, being preferred by 
those who place security and a low rate of income above risk 
and a higher rate. 

The stock exchange. — With the beginning of the corporate 
form of organization there also begian a desire on the part of 
persons to buy and sell stocks and bonds. Soon a need was felt 
for some sort of central market where buyers and sellers, or 
their agents, could meet to bargain. The result was the stock 
exchange, such as the one in New York City, where the members 
come together daily for the purpose of buying and selling stocks 
and bonds, usually for their customers. The development of 
such a central market has affected favorably the growth and 



94 ELEMENTARY ECONOMICS 

spread of corporations. Investors are easily persuaded to buy 
stocks and bonds, since they know that they can dispose of them 
without difficulty. In other words, investments in stocks and 
bonds are liquid investments. Consequently, billions of dollars 
have been saved to industry, which otherwise would have been 
consumed or invested to less advantage. 

Corporations and funded incomes. — Corporation develop- 
ment has made savings and investments permanent as well as 
easy. Not many years ago it was a common saying that in 
America it was but " three generations from shirt sleeves to 
shirt sleeves," meaning thereby that one generation saved, the 
next squandered, the next saved, and so on in an endless round. 
Whatever may have been the validity of this saying a half cen- 
tury ago, it certainly has not been true since corporations have 
come to occupy such a large place in American industrial life. 
Now a boy does not need to be able to succeed in business in 
order to keep his inheritance intact. He can invest it safely in 
bonds, or even in stocks, enjoying the income while he lives, 
passing the principal on to the next generation. Such an 
income is known as a funded income. The facility to invest 
huge sums of money with a reasonable degree of safety accounts 
in large measure for numerous other modern developments. 
Life insurance companies, for example, owe much of their 
growth and prosperity to the ease and slight expense with which 
they can invest their funds. Otherwise, their chief source of 
investment would be real estate mortgages, which, while safe, 
are expensive to handle. Many colleges and universities, too, 
owe their rapid development not more to the generosity of 
friends than to the opportunity they have to invest their 
endowments. Numerous other institutions, such as libraries, 
hospitals, learned societies, and settlement houses, have their 
endowments invested in the same way. 



ORGANIZATION OF INDUSTRY 95 

EXERCISES AND PROBLEMS 



1. What was the essential difference between the English Industrial 
Revolution and the American Industrial Revolution? 

2. What does an "industrial revolution" mean? 

3. Is there likely to be another industrial revolution ? Why, or 
why not ? 

4. Name three important changes in agriculture during the past 
half century. 

5. How did the tariff act of 1816 differ from preceding tariff acts? 

6. What is meant by the expression "domestic manufactures"? 
' ' factory system ' ' ? 

7. What are the disadvantages of a partnership? 

8. Why did the corporative form of business organization develop? 

9. What are the chief merits of this form? 

10. What is a "corporation charter"? 

11. Where and how is it usually obtained? 

12. Distinguish between stocks and bonds. 

13. Why are most farms operated by single enterprisers? 

B 

1. Make lists of single enterprisers, partnerships, and corporations 
in your neighborhood. 

a. In which list are found the concerns that employ the largest 

capital ? 
6. What kinds of business, in general, characterize each of these 

lists? 

2. Get, if possible, a partnership agreement from some business man. 

a. How much money did each partner invest ? 

b. What specific duties are required of each partner? 

c. How may the partnership be voluntarily dissolved? 

3. Write up what you would consider a good partnership agreement 
for three men about to engage in the grocery business. 

4. Examine a stock certificate, and notice the following facts : 

a. Name of owner. 

b. Number of shares. 

c. Par value of each share. 

d. Common or preferred. 



96 ELEMENTARY ECONOMICS 

5. Study a stock report, to be found in any metropolitan newspaper. 
a. Notice the wide variation in the prices of stocks. 
h. Why do not bonds vary so widely? 

c. Compare price of common stock and price of preferred stock 

of the same concern. 

d. Which is subject to wider fluctuations? Why? 

C 

1. Comment on the following statement: "The enactment of 
corporation laws by the various states is the most important step in 
the development of American manufactures made during the past 
century." 

2. "A corporation is nothing more than a person without a soul." 
a. Explain the general attitude of corporations toward society. 
h. Why do many persons think it permissible to cheat a cor- 
poration ? 

c. Can a corporation die ? Explain. 

3. A corporation with a capital of S50,000, having outstanding four 
per cent bonds with a par value of S50,000, earns $5000 annually. 

a. How will these earnings be divided? 
h. What will be the di\-idend rate : 
i. If all the stock is common? 
ii. If all the stock is preferred? 

iii. If one-half of the stock is eight per cent preferred? 
c. What would be a fair market price of stocks under each 
condition? 

4. Suppose a corporation with a capital of $100,000, having out- 
standing five per cent bonds with a par value of $50,000, should fail. 
How would settlement be made if the total assets sold for $45,000? 
for $55,000? for $75,000? for $100,000? How, if a partnership? 

SUPPLEMENTARY READING 

Bullock, IntroducHon to the Study of Economics, 3d ed., pages 153-166. 

Ely, Outlines of Economics, 3d ed., pages 212-232. 

Fetter, Economics, Vol. II, pages 408-411. 

Johnson, Introduction to Economics, pages 125, 126. 

Seager, Principles of Economics, pages 153-169. 

Seligman, Principles of Economics, 5th ed., pages 96-98, 325-327. 

Taussig, Principles of Economics, 2d ed., Vol. I, pages 86-96. 



CHAPTER VIII 
DIVISION OF LABOR AND LARGE-SCALE PRODUCTION 

22. The Factors of Production 

Primary factors of production. — We have come thus far in 
our study of production without stopping to inquire about the 
factors, or forces, that make production possible. But there 
is need at this point to classify these factors and to examine 
briefly the part each plays in producing goods. 

The two primary factors of production are land and labor. 
Of these two, the most important, certainly the one that came 
first in point of time, is land. The term ''land " in economics 
includes more than farm lands. It embraces city lots, railroad 
rights-of-way, forests, mines, lakes, rivers, harbors, and oceans. 
Land furnishes not only our food and clothing, but also our 
homes, our automobiles, and every other commodity we may 
possess. Besides, it provides a place on which to live, to work, 
to play, to sleep. Even before the first man had felt the need 
to labor, land had been producing for ages. Witness our vast 
coal beds. What man or group of men had anything to do with 
their formation? Yet we mine the coal and carry it away 
without even a thought of the force that land has exerted to 
produce it. We do, however, approach a proper appreciation 
of the importance of land, when it fails unexpectedly to produce, 
as is the case when a widespread drought prevails in grain- 
growing regions, when we feel a deprivation resulting from the 
extinction of some fur-bearing animal, or when we see the havoc 
caused by a mine subsidence within the limits of a populous 
city. 

97 



98 



ELEMENTARY ECONOMICS 



YEAR 
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DIVISION OF LABOR, LARGE-SCALE PRODUCTION 99 

Land works blindly, and apparently without purpose. The 
same force that stored the coal in the earth raised useless moun- 
tain peaks. This force can, however, be directed. In fact it 
is directed by man. This direction we call labor. Historically, 
as well as in degree of importance, labor ranks second to land, 
since without land labor could not even exist, much less produce. 
Whatever our own narrow experience may be, we know that the 
most universal, conscious activity, aside from consumption, is 
labor. On the farm, in the shop, store, and office, about the 
home, men and women, and even children, labor daily to produce 
commodities for the satisfaction of human wants. Strange as 
the statement may appear, labor in large part is a habit, which 
robs it fortunately of much of its irksomeness. 

Secondary factors of production. — Obviously, the third 
factor of production, capital, came after labor and land. Primi- 
tive man soon learned, in a blundering way perhaps, that he 
could well afford to spend labor on the making of a bow and 
arrow, or on a stone ax, since by their use he could secure more 
game or more fuel than was possible working with his hands 
alone. At that moment capital came into existence. It is 
well to notice that this first capital was itself the product of a 
combination of land and labor, and that all capital, rather in- 
directly to be sure, rests on the same two primary factors of 
production. This very fact is the basis for the claim that all the 
products of industry belong to labor. Turning again to the 
creation of the first capital, let us formulate a definition of the 
term as used in economics. Obviously from what has been 
said, it was the product of industry, also it was used to further 
production. Capital, then, is a product of industry used for 
further production. 

On the basis of this definition we shall find it necessary, 
contrary to general belief, to consider neither land nor con- 
sumers' goods as capital. Land, obviously, is not a product of 



100 ELEMENTARY ECONOMICS 

industry, though it is used for further production. Consumers' 
goods, on the other hand, are the product of industry not used 
for further production. Whether or not a good is a producers' 
or a consumers' good usually depends on the use to which it is 
to be put at the particular moment. Wheat flour, for example, 
in the possession of a baker is a producers' good ; in the flour 
bin at home it is a consumers' good. 

The fourth factor of production, we may say, is the enter- 
priser, or business man. His duty is to assemble the other 
factors and to direct their efforts. It is not, however, an in- 
dispensable one, for it would be easy to conceive an industrial 
society rather highly developed without men exercising the 
distinctive duties of an enterpriser. Yet we must not forget 
that society as it is now organized utilizes the services of such 
men ; also that if each man worked for himself and confined his 
own consumption exclusively to his own products, the efficiency 
of his production would depend in some measure on his ability 
to organize his own labor, his own land, and his own capital. 
For that reason we are justified in calling the skill of enterprisers 
a factor of production. 

23. Division of Labor 

Varieties of division of labor. — In the early life of a people 
and on the frontiers of older nations, every man must necessa- 
rily be a jack-of-all-trades. He must clear his land, build his 
fences, construct his cabin and sheds, make his own furniture, 
tan the leather for his shoes, and perform many other similar 
tasks, all of which are necessary to his very existence. As 
population increases, each one gives more and more attention 
to the trade or profession he is best prepared to follow. Some 
become carpenters ; some, farmers ; some, blacksmiths ; and 
some, tanners. The carpenter, for example, spends his whole 
time engaged in his trade, and he is able to perform all the opera- 



DIVISION OF LABOR, LARGE-SCALE PRODUCTION 101 

tions which are necessary in erecting a building. He does the 
finishing work as well as erect the frame. Moreover, he makes 
doors, glazes windows, and builds furniture. Likewise the 
farmer, the blacksmith, and the tanner, each performs all the 

Population of the United States in Municipalities having over 
30,000 Inhabitants, in those having from 8,000 to 30,000, and 
outside such Municipalities : 1790-1912. 



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operations necessary to carry his product from the raw material 
to the finished state. This stage of industrial development 
characterized American life and industry for two centuries; 
and we may call it simple division of labor. 

The next step in the development of division of labor con- 
sisted in dividing the operations of a single trade among in- 



102 ELEMENTARY ECONOMICS 

dividuals or groups. Instead of the carpenter, we have work- 
men for the rougher work, others for finishing, others for door 
and cabinet work, and still others who specialize in glazing. 
This stage we call the complex division of labor, and we may 
observe its operation all about us in every craft and profession. 
Carpenters alone no longer build our houses. To assist them 
we employ masons, plasterers, plumbers, and electricians. Pro- 
fessional people likewise specialize in narrow fields. Some 
physicians give their whole time to particular ailments ; lawyers 
become highly trained in particular kinds of work ; while 
teachers confine their attention to as few subjects as possible. 

Perhaps the best example in the development of the division 
of labor is found in the manufacture of shoes. Under pioneer 
conditions a workman tanned the leather and from it made 
shoes for himself and family. Later he gave his whole time to 
making shoes, disposing of the surplus to his neighbors. At the 
present time the making of shoes is confined almost entirely to 
factories, where scores of men perform as many different opera- 
tions in making a single shoe. 

The encroachment of the complex division of labor on 
crafts and trades has had a curious effect. It has, as it were, 
robbed the craftsman of his skill. Shoemakers no longer make 
shoes, neither do watchmakers make watches, while a tailor 
shop is often nothing more than a place for repairing, cleaning, 
and pressing clothing. 

Human qualities necessary for effective division of labor. — 
The more complex forms of division of labor have developed 
with, and depended on, a corresponding development of the 
spirit of cooperation and mutual helpfulness among individuals. 
In any highly developed industry, the making of shoes, for 
example, the efficiency and progress of one worker depend on 
every other worker being in his place at the proper time and 
performing exactly the operation which he is expected to per- 



DIVISION OF LABOR, LARGE-SCALE PRODUCTION 103 

form. The failure of one workman properly to cooperate dis- 
organizes the whole series of operations and lessens the total 
output ; and such failure on the part of an individual or of in- 
dividuals leads not toward a higher stage of division of labor, 
but rather in the opposit«e direction. 

We may properly inquire, then, what are the chief character- 
istics which individuals ought to possess in order to bring division 
of labor to its highest point of development. They are four 
in number: (1) honesty, (2) obedience, (3) steadiness, (4) 
fairness. 

Honesty is the very heart of successful division of labor. 
Workers, in order to be highly efficient, must believe in their 
associates as well as in themselves. Each one must have the 
assurance that his fellow workers are performing their appointed 
tasks honestly and with a common purpose. Among dishonest 
men such an assurance would be impossible. Workers must 
also be obedient in following plans of operation; for complex 
division of labor, and even the simpler kinds, provide for those 
who plan as well as for those who execute. Workers engaged in 
specialized tasks must be steady as well as honest and obedient. 
Nothing disturbs industry more than the failure of workers to be 
on hand at the appointed time, or, if on hand, to be incapacitated 
by vicious habits. To take an extreme example, suppose the 
engineer of a shoe factory should fail to be in his accustomed 
place when the moment arrived for starting the machinery. 
Obviously, little or no work could be done until he was found or 
his place was filled. There are men who possess all these qual- 
ities in some degree, but who, nevertheless, retard the develop- 
ment of division of labor simply because they are so filled with 
prejudice, and so set in their ways, as to make them domineering, 
and hence unpopular among their associates. In other words, 
they are mentally unfair. Thus, workers in any line where 
division of labor is developed must cooperate not only indus- 



104 



ELEMENTARY ECONOMICS 



Per Cent of Total Population of the United States in Munici- 
palities HAVING OVER 30,000 INHABITANTS, IN THOSE HAVING 

FROM 8,000 TO 30,000 Inhabitants, and outside such Munici- 
palities : 1790-1912. 

PER CENT 
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1911 

1910 

1900 

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1880 

1870 

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1850 

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1830 

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1810 

1800 

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IHH^E'^ CENT IN CITIES WITH 30,000 OR MORE POPULATION 

[222 PER CENT IN CITIES WITH 8,000 TO 30,000 POPULATION 

\/////A 'P^^ CENT OUTSIDE SUCH CITIES 

trially, but also socially, each giving and taking in a spirit of 
conciliation and compromise. 

Economic and social advantages of division of labor. — 
Obviously, the first economic advantage of division of labor is 
an increased production. The early shoemaker, by confining 
his attention to the making of shoes, increased his skill, with the 
result that his product was greater than it had formerly been 
when he was compelled to tan his own leather. Likewise, the 
workers in a shoe factory become highly proficient in the few 
simple operations which they perform, and though their in- 



DIVISION OF LABOR, LARGE-SCALE PRODUCTION 105 

creased output may not be so evident as it was in the former 
case, it exists nevertheless. Division of labor has still another 
economic advantage. The few simple operations that char- 
acterize complex division of labor are easily learned, and for that 
reason no long period of training or apprenticeship is necessary, 
as was formerly the case. Consequently there is a saving of time 
both by the employee, who quickly becomes a skilled operative, 
and by the employer, who finds it unnecessary to spend any great 
amount of time in training his workmen. The chief economic 
advanta'ge of division of labor, to repeat, is increased output, 
which is accomplished to a great extent through specialization, 
and through a saving of time formerly necessary to acquire skill. 

Socially, there are advantages to be derived from complex 
division of labor. The same qualities that make workers indus- 
trially efficient and teach them to cooperate also develop the 
spirit of social service, and do much to rob the individual of his 
selfishness. Men who work together all day are easily organized 
into unions and social clubs. Their close contact in industry gives 
them a common interest and assists in creating a social solidarity. 

Division of labor produces yet another social advantage. 
With increased production it is no longer necessary for workers 
to labor twelve or fourteen hours a day. Moreover, the workers 
themselves through organization have become stronger, and 
better able to secure their demands. These two forces have 
combined to shorten the labor day, and correspondingly to 
increase the daily periods of leisure. The result is that workers 
in specialized lines have more time for recreation, for social 
intercourse, and for self-education. 

Disadvantages of complex division of labor. — Not all of 
the results that arise from highly developed division of labor 
are advantageous, either to the individual or to society. The 
monotonous repetition of simple operations tends to stunt the 
intellect, and to destroy the power of initiative. Moreover, 



106 ELEMENTARY ECONOMICS 

it discourages ambition, since it narrows the horizon of the 
worker and appears to offer him httle or no opportunity to 
improve his industrial position. In short, complex division of 
labor tends to rob the individual of intellect, initiative, and 
ambition, all of which are essential to the best interests of 
society. In the professions, however, similar specialization 
appears to be less deadening, if it is deadening at all. 

24. Territorial Division of Labor 

Principle of the territorial division of labor. — Quite as im- 
portant as the division of labor among individuals and among 
groups where each performs a highly specialized piece of work, 
is the division of labor among localities and regions. This we 
may call territorial division of labor; and its development has 
depended in large measure on improvements in transportation, 
particularly railway transportation, and on the use of money as 
a medium of exchange. In medieval England and during our 
own colonial period each section or region was well-nigh self- 
sufficing ; that is, it produced practically all the goods consumed 
by its inhabitants. Similar conditions existed on the western 
frontier during the greater part of the nineteenth century. 

Territorial division of labor, as has been noted, waited for 
its development on improved methods of transportation and on 
a money economy ; yet the underlying causes for its existence 
are as old as time itself. Soil, climate, water power, mineral 
deposits, and a variety of other natural resources create differ- 
ences among the various sections of a large country like the 
United States and among the smaller countries of Western 
Europe. As a result, the people of one section can best afford 
to spend their energies in raising wheat, of another in growing 
grapes, of another in herding sheep, of another in building ships, 
and of another in manufacturing iron or cloth. Each section, 
assisted by nature and by an increased skill and knowledge due 



DIVISION OF LABOR, LARGE-SCALE PRODUCTION 107 

Proportion of Population 10 Years of Age and over, in Each 
State, Engaged in Each General Division of Occupation : 1910. 



MissrssiPPi 

SOUTH CAROLINA 
ARKANSAS 
ALABAMA 
NORTH CAROLINA 
GEORGIA 
NORTH DAKOTA 
TEXAS 
OKLAHOMA 
SOUTH DAKOTA 



NEW 



HEXICO 



TENNESSEE 

KENTUCKY 

LOUISIANA 

NEBRASKA 

VIRGINIA 

IDAHO 

KANSAS 

FLORIDA 

IOWA 

WEST VIRGINIA 

MISSOURI 

VERMONT 

MINNESOTA 

WISCONSIN 

WrOMINQ 

INDIANA 

MONTANA 

MICHIGAN 

OREGON 

UTAH 

DELAWARE 

MAINE 

ARIZONA 

COLORADO 

WASHINGTON 

OHIO 

MARYLAND 

CALIFORNIA 

ILLINOIS 

NEVADA 

NEW HAMPSHIRE 

PENNSYLVANIA 

CONNECTICUT 

NEW YORK 

NEW JERSEY 

RHODE ISLAND 

MASSACHUSETTS 

OIST OF COLUMBIA 




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^^MANUFACTURING AND MECHANICAL INDUSTRIES ITfl TRANSPORTATION 

^ffl TRADl I I PUBLIC SERVICE (NOT ELSEWHERE CLASSIFIED) 

E23 PROFESSIONAL SERVICe ^^ CLERICAL OCCUPATIONS 

229 DOMESTIC Alto PERSONAL 8EBVICE 



108 ELEMENTARY ECONOMICS 

to specialization, produces commodities of a greater value than 
it could produce were it compelled to engage in other and less 
productive industries. Hence, it produces a surplus, which it 
exchanges for the surpluses of other sections. 

Territorial division of labor in the United States. — In no 
other country has territorial division of labor developed more 
rapidly and to a greater extent than in the United States. Here 
we have a diversity of natural resources, which are utilized to 
advantage by a people naturally apt and trained above the 
average. Nowhere else are there, on such a large scale, more 
fertile farm lands, more productive mines, and more accessible 
water power. For that reason the United States has become a 
great manufacturing nation, without losing its position as the 
leader in agricultural production. 

The particular reasons for the superiority of one section 
over another in any line of industry are fairly easy to under- 
stand. In New England, fertile land is scarce, an adequate 
fuel supply is relatively close at hand, and the population is 
dense. There we find manufactures. A similar condition 
exists in New York, Pennsylvania, and New Jersey. The great 
Mississippi Valley, which is the largest area of fertile land in 
the world, furnishes foodstuffs in the form of corn, wheat, cattle, 
and swine. Here also are to be found many manufacturing 
establishments, for the city population is large and the 
mineral supply is available and plentiful. The southern and 
southwestern sections produce cotton ; the Pacific Coast, 
fruit, lumber, and grain; the Rocky Mountain regions, 
minerals and lumber. 

25. Large-scale Production 
Advantages of large-scale production. — One of the most 
common phenomena to be observed in business at the present 
time is large-scale production. Almost every line of industry 



DIVISION OF LABOR, LARGE-SCALE PRODUCTION 109 

has felt its influence. Rapidly our factories have been en- 
larged ; and our railway lines lengthened and consolidated 
into great systems. Even in retailing, the advantages of large 
scale production have been demonstrated. Agriculture alone 
seems to stand unaffected, with the result that the average size 
of farms in the United States is less than it was a half century 
ago. 

The adaptation of the principle of large-scale production 
to American industry has created several distinct and highly 
important problems. Obviously, the first result is an increased 
output, and the distribution of this increase among the various 
factors of production (labor, including the enterpriser, land, 
and capital) creates problems both social and economic. 
Large-scale production causes the concentration of workers, and 
this concentration raises problems of housing, of government, 
and of social development. Furthermore, large-scale production 
permits of a decreased unit-cost production, with the result 
that small industries are driven out of business, while the large 
ones tend to become monopolies. Such a development has 
actually taken place in the United States, where many lines of 
production have fallen into the hands of the so-called trusts. 

We have seen how large-scale production increases the output 
at a decreased cost, and we may now properly inquire why such 
is the case. 

The factors that contribute to the efficiency of large-scale 
production are five in number. (1) Division of labor, which 
always accompanies large-scale production, permits the use 
of varied talents and aptitudes, whereby each worker can con- 
fine his attention and efforts to the particular operation in which 
he is the most proficient. (2) The latest and most improved 
machinery can be utilized, something which is usually impossible 
in small-scale production. In the Chicago plant of the Inter- 
national Harvester Company is a machine costing several 



no ELEMENTARY ECONOMICS 

thousand dollars which performs a simple operation on wagon 
and other tongues at a saving over old methods of a few cents 
each. Obviously, such a saving, which mounts high in the 
aggregate, is possible only when the volume of output is enor- 
mous. (3) Large-scale production also permits of economies 
in buying raw materials and in selling finished products. It is 
a well-known fact that large purchasers can buy at a cheaper 
price than small ones ; and equally as well known that large 
producers are able to economize in the matter of advertising, 
and of getting their products in the hands of retailers through 
traveling salesmen. (4) Large-scale industries are better able 
to utilize their by-products. In the slaughtering industry, for 
example, a large plant can make use of hair, blood, and other 
by-products which the local butcher allows to go to waste. (5) 
The large-scale producer can better afford to carry on expensive 
experiments with the idea of improving his product and of 
lessening unit cost. So well recognized is this advantage that 
such large concerns as the United States Steel Corporation 
maintain extensive laboratories and employ a great many 
trained experimenters. 

Restrictions on large-scale production. — There are several 
restrictions on large-scale production, one or two of which we 
may profitably examine at this point. First of all, any indus- 
try is likely to grow so large as to become unwieldy. Such an 
industry is no longer the " child " of the one who developed it. 
It is now impersonal. Consequently, its administration and 
management is divided among hired superintendents : each 
ambitious to develop his own department ; each more or less 
selfish in his attitude toward the whole industry ; and none with 
the keen interest of the owners of smaller plants. When a unit 
of industry reaches this stage in the development of large-scale 
production, it is likely to be less efficient than smaller ones in 
the same line of business. Such industries resemble in many 



DIVISION OF LABOR, LARGE-SCALE PRODUCTION 111 

respects the overgrown trees of the forest, towering above their 
fellows in height, but rotten at the heart and exposed to every 
passing storm. 

EXERCISES AND PROBLEMS 

A 

1. Why is land the most fundamental factor of production? 

2. Why is capital less fundamental than either land or labor ? 

3. Distinguish between capital and land ; capital and consumers' 
goods. 

4. Does capital yield a product apart from the employment of 
labor ? Explain. 

5. What are the advantages of division of labor? 

6. Suggest ways of lessening the disadvantages arising from the 
division of labor. 

7. What factors may limit the division of labor in any industry? 

8. What is the relation between the corporative form of organi- 
zation and division of labor ? 

9. Why is division of labor in agriculture not practiced to any great 
extent ? 

10. How does territorial division of labor increase the efficiency of 
production ? 

11. What is the present tendency in the United States as to terri- 
torial division of labor ? 

12. Point out the relation between division of labor and large-scale 
production ; between the corporative form of organization and large- 
scale production. 

13. Are there any advantages in large-scale production in agri- 
culture ? Explain. 

14. What are the limits to large-scale production? 

15. What are the present tendencies as to large-scale production in 
manufactures ? 

B 

1. Make a list of consumers' goods. 

a. Explain why each is a consumers' good. 
h. Can any of them be producers' goods? 

c. What is the essential difference between consumers' goods and 
producers' goods? 



112 ELEMENTARY ECONOMICS 

2. From your own experience or observation describe the division 
of labor carried on in some shop or factory. 

3. Call to mind persons who produce all the goods they consume ; 
who produce a portion of the goods they consume ; who produce none of 
the goods they consume. Which is the largest group ? Why ? 

4. Make a list of common schoolroom objects, such as desk, black- 
board, book, crayon, ink, eraser, and note the importance of territorial 
division of labor. 

5. Mention several industries in the same line. 

a. In which is division of labor best developed ? 

b. Show how there is room for greater development. 

c. In which is division of labor least developed ? 

d. Account for this lack of development. 

e. Which of the two has the greater capital ? 
/. Which is the more enterprising? 

g. Suggest methods of improvement. 



1. A well-known retail merchant once said that the cornerstone of 
any business success is honesty. 

a. What did he mean by the expression "honesty"? 

b. Is an employee thoroughly honest who : 

i. Shirks his duties? 
ii. Keeps one eye on the clock? * 
iii. Places his employer's interests second to his own? 

c. What is your opinion of the axiom, "Honesty is the best 

p'oliey"? 

2. It is believed by many people that each section of the country 
would be greatly benefited by becoming self-sufficing. 

a. If such were the case, would there be more or less goods 

produced ? 

b. How would such a condition affect wealth ? welfare ? 

c. How do the railroads regard self-sufficiency? 

3. Comment on the following statements : 

a. "Division of labor is the unconscious cooperation of the 

members of society." 

b. "Producers' goods ripen into consumers' goods." 

c. "Large-scale production in any industry is limited only by 

the amount of capital which that industry can control." 



DIVISION OF LABOR, LARGE-SCALE PRODUCTION 113 



SUPPLEMENTARY READING 

Bullock, Introduction to the Study of Economics, 3d ed., pages 149- 

156, 176-184. 
Ely, Outlines of Economics, 3d ed., pages 19-21, 124-129. 
Fisher, Elementary Principles of Economics, pages 193, 450, 451. 
Johnson, Introduction to Economics, pages 110-120. 
Seager, Principles of Economics, pages 153-169. 
Seligman, Principles of Economics, 5th ed., pages 290-296. 
Taussig, Principles of Economics, 2d ed.. Vol. I, pages 30-66. 



CHAPTER IX 

LAND (NATURAL RESOURCES) 

26. Land as a Productive Factor 

Nature and definition of land. — '- We have noticed already 
that land, which is a short and expressive term for natural 
resources, is one of the factors of production ; and that the 
other two chief factors, labor and capital, are useless without its 
cooperation. Now we may properly turn our attention to a 
more detailed examination of the part which land plays in the 
production of economic goods. 

Land is the basis of all production, the source of all economic 
wealth. From it, directly or indirectly, come all of the raw 
materials on which the whole process of production rests. 
Labor and capital take the raw materials of nature, and then 
create, as we have seen, utilities of form, place, time, or posses- 
sion, but farther than that they cannot go. Land as such 
labors without reward, and its products are free to him who will 
come and take them ; who under conditions of modern society is 
the landowner. Of the three chief factors in production, land 
alone is incapable of being appreciably increased in amount : for 
all practical purposes the surface of the earth is fixed in area, and 
its productive quahties are fairly well known. At least they are 
predetermined, and merely wait tobeutihzed by labor and capital. 

To get a clearer understanding of the term ''land," let us di- 
vide it into its numerous subdivisions. There is the large area of 
farm land from which the world gets its food supply and a great 
deal of its material for clothing ; the forests provide lumber and 

114 



LAND (NATURAL RESOURCES) 



115 



fuel ; city lots furnish sites for dwellings, stores, warehouses, and 
factories ; from the mines come fuel, iron, and precious metals, 
and from the quarries, stone for building and other purposes ; 

Relative Proportion of Improved and Unimproved Land Area in 
Farms to the Total Land Area of the United States : 1860, 
1890, 1910. 




waterfalls generate power ; while waterways, harbors, and rail- 
road lands facihtate the transfer of goods from the producer to 
the consumer. All these are but different phases of the same 
factor — namely, land, or natural resources. 

Varying costs in production. — From what has been said 
it will readily be understood that, inasmuch as nature is stingy 
and has seen fit not to distribute her bounties everywhere ahke, 
the productivity of land varies from one piece to another. That 
this statement is true, can be verified on every hand. One plot 
of ground produces more wheat than another of the same size on 
which an equal amount of labor and capital has been expended. 
Similarly, one building lot yields more utilities than another ; 
and one mine is more cheaply worked than another. In the first 
case, the most important factor, though by no means the only 
one, is fertility ; in the second it is location ; and in the third it 
is depth of shaft and thickness of vein. But in any of the three 
cases nature has contributed in varying degrees of effectiveness, 
thereby causing differences in the costs of production. 



116 



ELEMENTARY ECONOMICS 



Our more general experiences in varying costs of production 
are with agriculture. One farmer cultivates soil especially 
adapted to corn-growing. Another farmer, on land less fertile, 
labors just as hard and employs an equal amount of capital. 
Yet he gets smaller returns. Still another farmer, on the 
poorest land, which we shall, in anticipation, call no-rent land, 
grows exactly enough corn to repay him for his employment of 




Copyriyht Underwood & Underwood, \ . Y . 

A Modern Method op Harvesting Corn. 

labor and capital. Obviously, the first farmer enjoys a relatively 
large return over and above his costs of production ; the second 
one, a fair return ; while the farmer on the no-rent land gets no 
such return. Thus, other factors in fixing the costs of growing 
corn, such as location, skill in farming, improvement in the arts, 
remaining the same, the unequal contribution of natural re- 
sources in the form of fertility, climate, and rainfall causes a 
corresponding difference in costs of production to corn-growers. 



LAND (NATURAL RESOURCES) 117 

Scarcely less important in causing varying costs of pro- 
duction in growing corn, or any other agricultural crop, is 
location. Our farmer who cultivates the best land might lose 
the advantage coming to him from the use of the most fertile 
soil, if his farm were located in some region remote from trans- 
portation facilities ; that is, his gain from fertile soil might 
be offset by his loss through costly transportation. For that 
very reason farm lands situated near markets or at least near 
good transportation lines, rail or water, ordinarily command 
higher prices and higher rents than would be the case if less 
advantageously located. 

Concrete examples of varying costs of production in agri- 
culture due to the unequal distribution of the gifts of nature 
or to differences in costs of transportation are easily found 
in the United States. New England farmers, as a class, have 
less fertile soil than Iowa farmers. Hence, their cost of pro- 
ducing a bushel of corn is higher than it is in Iowa. Also in 
Iowa two pieces of land of the same fertility may show differ- 
ences in unit-cost of production owing to the superior location 
of one or the other in respect to transportation. 

In the use of any other form of land — city lots, mines, 
waterfalls — similar differences arise. Two merchants' of 
equal ability, with stocks of goods exactly alike, will carry on 
their respective businesses at different costs of production if 
the two pieces of land which they utilize are not similarly 
situated as to the passing crowds. Likev/ise, the owners of 
mines find differences in costs of production owing to the depth 
of the ores, and the location of the mines. Everywhere in the 
use of land these differences appear, causing differences in costs 
of production. 

Because of the important place which land holds in production 
we can well afford to spend the time necessary to make a hurried 
survey of the natural resources of our own country. 



118 ELEMENTARY ECONOMICS 

27. Natural Resources of the United States 

Agricultural lands. — The most outstanding feature of 
American industry is the abundance of fertile farm lands. Upon 
no other country has nature lavished this gift so freely, and no 
other people have appropriated this gift to better advantage. 
Here we have a partial explanation of the prosperity of our 
people and a partial cause of our disregard for thrift. 
Continental United States embraces an area of approximately 
three million square miles, or two billion acres. Of this great 
area practically one-half is under cultivation. The rest is 
utilized for other industrial purposes, such as in city sites, in 
forests, and in reservations, or is allowed to remain unappro- 
priated as are the desert lands in the Southwest. The wide 
expanse of the country north and south accounts in large part 
for the diversity of crops which we are able to produce. From 
the North and Northwest comes wheat ; from the central 
Mississippi Valley, corn and oats ; from the upper South, to- 
bacco ; from the Gulf regions, cotton, rice, and sugar ; from 
California and Florida, subtropical fruits; while the production 
of hay, vegetables, small fruits, live stock, poultry, milk, and 
cheese is carried on in all sections of the country. Thus, the 
variety of the agl'icultural products of our country is as great 
as that of all Western Europe with its numerous political units 
and its relatively large population. In other words, the United 
States as a single nation possesses agricultural possibilities 
possessed by no European country. 

Forests and mines. — The United States is rich also in forests, 
despite the prodigal waste of timber that has gone on for more 
than a century. Oak, pine, cypress, and other kinds of trees 
are found in abundance, which accounts for the common saying 
that " America is a land of wooden houses." Every year the 
forests of the country yield billions of feet of lumber, and 



LAND (NATURAL RESOURCES) 



119 




120 ELEMENTARY ECONOMICS 

enormous quantities of wood pulp, fuel, mine props, and 
numerous other products of commerce. As might be supposed, 
our forests are in danger of depletion. The national govern- 
ment, however, as well as a number of the states, have under- 
taken seriously within the past few years to prevent forest waste 
and to see that planting of forest trees is not neglected. 

Our mines are also rich, numerous, and widely distributed. 
The California gold fields were for many years after 1848 the El 
Dorado of the whole world. This industry is still important, 
though it has been robbed of much of its romance and glamour 
by the more prosy methods of capitalistic production. Soft 
coal is found in abundance in many widely separated regions, 
while hard-coal mining is confined to eastern Pennsylvania. 
Our deposits of iron ore, which seem to be almost inexliaustible, 
are also found in many localities. Silver, copper, zinc, and lead 
add materially to our mineral resources, while petroleum, from 
which gasoline, oils, and other products of commerce are made, 
mounts annually in value to hundreds of millions of dollars. 

Water power and the fisheries. — The third group of natural 
resources which we will notice in this connection comprises 
water power and the fisheries. For many years after steam 
began to be successfully applied to drive machinery, the water- 
falls of our country remained unimportant sources of natural 
power. The discovery of electrical energy and of methods to 
apply it to machinery and to transmit it great distances, once 
more called attention to the desirability of utilizing waterfalls 
as a source of mechanical power. The successful attempt to 
harness Niagara Falls has been followed with similar successes 
in other sections, until it now appears that it is only a question 
of time until every waterfall in the country will be the seat of 
electrical generating plants. 

In recounting the wealth of our natural resources we are 
likely to overlook the fisheries, which are the basis of the 



LAND (NATURAL RESOURCES) 



121 




122 ELEMENTARY ECONOMICS 

prosperity of many localities. The sea fishing of all three 
coasts is a profitable industry, giving employment to thousands 
of men and boys and furnishing one of our most important 
supplies of food. On the Great Lakes, and along the rivers also, 
fishing is important. Fortunately for the fishing industry, the 
national government and many of the states have enacted 
laws designed to prevent waste and depletion. To that end, 
restrictions are placed as to the time and methods of catching 
fish ; and the stocks of fish are replenished periodically from 
public hatcheries. 

28. The Law of Diminishing Returns 

Statement of the law. — The most important economic law 
under the head of production is known as the " Law of Diminish- 
ing Returns." This law applies alike to land, to labor, and to 
capital. Stated in terms of land in the simplest possible manner, 
the law is : As additional units of labor and capital are applied 
to the utilization of a given piece of land, the increase in the product 
gained from the land will for a time he greater than the increase in 
the number of units of labor and capital expended; after which 
the increase in the product will decline relative to the increase in 
the number of units of labor and capital. 

Application of the law. — The operation of the law of diminish- 
ing returns is best observed in agriculture. Obviously, the prod- 
uct to be gained from a plot of land by one man unaided by 
machinery of any sort would be relatively small. He could, as 
the primitive American Indian did before him, scratch the 
ground with a sharpened stick and cultivate his crops with a 
shell. Given a strong hoe, it is likely that he could materially 
increase the quantity of his crop. Thus, step by step with the 
aid of horses, improved machinery, drain tile, fertihzer, and 
laborers our farmer would find it possible for a time to increase 
the product of his land faster than his increase in the application 



LAND (NATURAL RESOURCES) 123 

of labor and capital. He would find also that eventually the 
product arising from the addition of a unit of labor and capital 
was less than the product arising from the application of the 
preceding unit. Then he would have reached the point of 
diminishing returns. Further applications of labor and capital 
would show a constant decrease in product attributable to the 
successive units of labor and capital employed. Presently the 
point of greatest efficiency would be reached, which we may say 
is the point where labor and capital can be applied to the very 
best advantage on this particular piece of land. 

It will aid in understanding this important law if we resort 
to a graphic illustration. Suppose a farmer has a unit of labor 
and capital which he applies to a given piece of land with the 
result that he gets a product of 8, represented in Fig. 7 by the 
letter a. Suppose further that the application of another unit 
brings an additional product of 13 (6) ; of another, 16 (c) ; of 
another, 18 (d) ; and of another, 17 (e). Clearly, the fifth unit 
of labor and capital produces less than does the fourth unit. 
Hence, the point of diminishing returns is between these two 
units, at E. Additional units of labor and capital may be 
applied, however, before the point of greatest efficiency is 
reached. According to our assumption, the fifth unit of labor 
and capital will yield a product of 17 (e), whiph is greater than 
can be had on new land similar to the piece of land which we have 
under consideration, for the product (17) exceeds the average 

product of the preceding units [ — — ~ — — = 13f )• 

Also, our farmer will find it advantageous to apply a 
sixth unit of labor and capital, which, we have assumed, will 
yield a product of 15 (/), for this is greater than the average 
yield of the five units already applied. The total product of the 
six units is 87 (8 + 13 + 16 + 18 + 17 + 15), or an average 
of 14^ (87 -j- 6). // similar new land is available he cannot 



124 



ELEMENTARY ECONOMICS 



afford to apply a seventh unit of labor and capital which yields 
anything less than 14i. He will not apply the seventh unit, 
which yields a product of but 13 (g). The point of greatest 
efficiency, then, is between units 6 and 7, designated in Fig. 7 
as G.. But the point of diminishing returns and the point 
of greatest efficiency may coincide. Suppose the fifth and 
sixth units of labor and capital yield a product of 13 and 11 

y 




Fig. 7. 

instead of 17 and 15. In that case the application of the 
fifth unit would be accompanied by a decline in product relative 
not only to the fourth unit but also to the average yield of the 
four already applied. 

Intensive and extensive margins of cultivation. — We may 
now notice in an elementary way the notions associated with 
intensive and extensive margins of land cultivation. When 
our farmer has reached the point of greatest efficiency (G in 



LAND (NATURAL RESOURCES) 125 

Fig. 7), he has, provided the price for his product justifies 
further expenditures, two possible courses before him : he 
may apply additional units of labor and capital on the piece of 
land on which he has already expended 6 units ; or he may 
apply these additional units to another piece of land. What is 
likely to be his action? If there is more land similar in every 
way to the piece he is already cultivating — which is unlikely — 
he will take up new land. If, on the other hand, the only land 
available is inferior to the piece which he is already cultivating, 
he will farm that piece more intensively ; just how much more 
intensively will depend on the relative inferiority of the avail- 
able land compared to the piece already under cultivation. 

The problems connected with the law of diminishing returns, 
and with intensive and extensive margins of cultivation, have 
a practical significance in agriculture. If it were not for the 
operation of the law of diminishing returns, all the wheat which 
the world needs could be grown on a relatively small area — 
on a city lot, even in a common flowerpot. Every farmer 
knows that it is not profitable beyond a certain point in culti- 
vation to hire more laborers, to buy more machinery, or to 
lay more tile ; and the higher the wage level, the higher the 
prices of machinery and materials, and the greater the abun- 
dance of good land, the quicker he decides to cease adding 
capital and labor. Here is the explanation of the extensive 
character of American agriculture. American travelers in 
European countries, returning home enthusiastic over the 
intensive methods of cultivation they find there, often criticize 
the farmers here for what appear to them to be careless methods 
of agriculture. The fact is that the farmer himself has a fairly 
good idea of the location of the point of diminishing returns and 
the point of greatest efficiency, even though he may never have 
heard of these terms. In other words, he has found by 
experience and observation that intensive agriculture is not as 



126 



ELEMENTARY ECONOMICS 



profitable in the United States as in older countries, largely 
because of the high wage level and the abundance of un- 
occupied lands. 



Value of Different Kinds of Farm Property in the United 

States: 1910. 



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LAND (NATURAL RESOURCES) 127 

Application of the law to other kinds of land. — The law of 

diminishing returns also operates in the use of other forms of 
land, such as mines and building sites. In mining, as well as in 
agriculture, there is a point of diminishing returns. Likewise, 
there are intensive and extensive margins of operation. Every 
mine owner knows that successive additions of miners and 
machinery will for a time increase the output of ore at an ever- 
increasing rate of speed. He knows also that a point will be 
reached eventually where this rate begins to decline. 

Owners of building sites, like the owners of farms and mines, 
face the problem of determining just how much labor and capital 
they should apply to their land. Obviously, one would apply 
more on a piece of land in lower New York City than on an 
equal-sized piece of land in an Iowa county-seat town. But how 
much more ? Shall the building have one floor, or shall it be a 
skyscraper? The piece of land will support one as easily as 
the other. Moreover, we may say, speaking roughly, that the 
same foundation and the same roof will suffice whatever the 
height of the building. Here, as it was in the case of agri- 
cultural land, the guide is the relation of the value of the labor 
and capital expended to the value of the product. The 
addition of a second floor to a store building in small towns, and 
a third or fourth in moderate-sized cities, usually increases 
the rate of returns to the land. There will come a point, how- 
ever, when the return from another floor will show a decline, 
which indicates that the point of diminishing returns was 
reached with the addition of the preceding floor. 

It will readily be seen that the application of the law of 
diminishing returns to building sites is intensely practical not 
only in the matter of stores and shops, but also in the matter of 
residences. All of us have seen costly houses on cheap lots; 
and, conversely, cheap houses occupying costly sites. In the 
first case the use of the land was intensive ; in the second, exten- 



128 ELEMENTARY ECONOMICS 

sive. The importance of these truths will become more evident 
when we take up the question of rent. 

EXERCISES AND PROBLEMS 

A 

1. Define "land." 

2. How does land differ from natural resources ? 

3. What are the chief factors in determining the productivity of 
farm land? 

4. Does the improvement of rural roads increase the productivity 
of farm lands through which they extend? Discuss. 

5. Why are some store sites more desirable than others? 

6. Why is such a large portion of the United States unimproved ? 

7. Why do farmers resort to the rotation of crops? 

8. Why are store buildings usually taller in cities than in towns or 
villages ? 

9. Is there any relation between the value of a residence site and 
the value of its improvement ? Explain. 

10. Why would it not be profitable for every farmer to own and 
operate a farm tractor? 

11. How many clerks should a merchant employ? 

12. How large should his stock of goods be ? 

13. Are there any limits to the size of the building he can profit- 
ably use? Explain. 

14. What considerations might cause him to change sites? the 
size of his stock of goods? the number of employees? 

B 

1 . Mention the most important natural resources in your community. 

2. What efforts are being made in your community to conserve 
natural resources? 

3. Locate on a map the more important regions devoted to the 
production of wheat, corn, cotton, tobacco, rice, sugar cane, coal, 
petroleum, and precious metals. 

4. What kinds of crops are best fitted for intensive farming? for 
extensive farming? Give five examples of each, preferably from your 
own neighborhood. 

5. Discuss the productiveness of various store "sites," and try to 
determine why differences exist. 



LAND (NATURAL RESOURCES) 129 

6. Locate the point of diminishing returns under conditions assumed 
in the erection of an office building as follows : 

Cost of site . . . $10,000 Total net annual rent Nothing 

Cost of first floor . 8,000 Total net annual rent $1,400 

Cost of second floor 5,000 Total net annual rent 1,900 

Cost of third floor . 4,000 Total net annual rent 2,350 

Cost of fourth floor 4,000 Total net annual rent 2,700 

Cost of roof . . . 1,000 Total net annual rent 2,700 

7. Draw a diagram illustrating the law of diminishing returns in 
some industry with which you are familiar. 

C 

1. American farmers are constantly being criticized because they 
do not produce as much per acre as English farmers. 

a. Is this criticism just? 

6. If so, why do not American farmers operate more intensively ? 

c. Are there limits to intensive farming? Explain. 

2. "The opening of the Erie Canal affected both intensive and 
extensive agriculture in the United States." 

a. How was the average size of farms affected ? 

h. In what ways was the New England farmer affected? 

c. What was the effect on farming methods in Ohio ? 

d. Did the kinds of crops grown undergo any changes ? Explain. 

3. A coal operator was requested by a government official during 
the summer of 1917 to state how much it cost to mine a ton 
of bituminous coal. His answer was: "Show me the mine." Why 
could he not answer more satisfactorily ? 

4. "Iowa and Central IlHnois are the heart of the best corn- 
producing region in the world." Comment. 

SUPPLEMENTARY READING 

Bullock, Introduction to the Study of Economics, 3d ed., pages 170-173. 
Ely, Outlines of Economics, 3d ed., pages 388-395. 
Fetter, Economics, Vol. I, pages 433-438. 
Johnson, Introduction to Economics, pages 91-105. 
Seager, Principles of Economics, pages 122-131. 

Seligman, Principles of Economics, 5th ed., pages 211-214, 302-306. 
Taussig, Principles of Economics, 2d ed., Vol. I, pages 185, 186 ; Vol. 
II, pages 59-62. . 



CHAPTER X 
CAPITAL AS A FACTOR IN PRODUCTION 

29. Source of Capital 

The surplus above subsistence. — According to our definition 
capital is the product of past industry used to further production. 
Just when and how the first capital appeared it is impossible 
to say, difficult even to imagine. Primitive man working with 
his hands alone must have found it difficult to secure anything 
over and above bare subsistence ; for even under the wildest 
condition we can hardly imagine that food, clothing, and shelter 
could ordinarily be procured in adequate amounts without 
labor. At some point in his development, however, we know 
that he began to create capital. Perhaps it was a bow and arrow 
he made, or a canoe, or a snare for small game, or a fish net. But 
where did he find the time for creating this capital? Perhaps 
a storm brought to the shore a surplus supply of fish, or an 
accident placed in his hands an extra deer. In either case he 
would find it possible to abstain a few days from the labor 
of getting food to sustain life. It is just as likely, however, 
that our primitive man, feeling instinctively the long-run gain 
to be had from the use of capital in production, consciously 
decreased his volume of consumption, even going hungry. Thus, 
by spending a part of each day in fashioning a crude tool or 
weapon, instead of spending his whole time in hunting or fishing, 
he was able eventually to create capital. We, his descendants, 
must do the same thing today if capital is to be increased or 
even conserved, and the first step to that end is to be able to 
curb desires and appetite. 

130 



CAPITAL AS A FACTOR IN PRODUCTION 131 

Saving. — Merely to curb desires and appetite in one direction 
is not enough if we permit them to run rife in other directions. 
Our primitive man when he discovered the surplus fish, might 
very well have refrained entirely from labor while they lasted, 
spending his time in sleep or in sight-seeing. We can even 
imagine his skimping himself in the matter of meat in order to 
find time to gather berries or nuts for food. Clearly, in neither 
case would he have created any capital. Nor should we under 
similar circumstances. A curtailment of expenditures in one 
direction may or may not contribute to an increase of capital. 
We must not, if we are to assist in the creation of capital, permit 
economy in the use of some goods to be entirely nullified by ex- 
travagances in the use of other goods. Consequently, the 
second step toward the creation of capital is that income must 
exceed outgo. 

Investing. — The surplus of income over outgo must be not 
only saved but also invested. If, after completing the canoe, 
our primitive man had hidden it away in some cave, obviously 
it would not have been capital ; for one of the characteristics 
of capital is its use to further production. Likewise, the hoard- 
ings of a miser do not increase capital. In fact they tend to 
decrease it. To make savings effective, therefore, in the crea- 
tion of capital, the saver must invest them directly in his own 
business, or in stocks or bonds, or indirectly through such in- 
stitutions as banks and building and loan associations. 

The source of capital, we are now prepared to say, lies three 
steps from the capital itself. First, the income must be above 
the line of bare subsistence ; second, income must exceed outgo ; 
third, the surplus must be invested. 

The significance of each of these steps becomes apparent 
when we view society as a whole. Everywhere in this country 
there are families with incomes that do not permit of consump- 
tion above the line of subsistence. Consequently, they are 



132 ELEMENTARY ECONOMICS 

unable even to take the first step toward the creation of capital, 
much less to go the whole journey. Then there are millions of 
families and individuals who have something left over after 
providing necessaries, but who have never learned to save. 
They could, if their imagination and will power were strong 
enough, assist in the creation of capital. Since they do not, 
their influence in this respect is little if any greater than their 
less fortunate neighbors. Fortunately for the progress of 
society, there are other millions who take the second step toward 
the creation of capital by spending less than they earn — by 
saving. Most of these, experience and observation teach us, 
do not hoard their savings, but place them where they can be 
utilized by productive industry. They, and they alone, are 
responsible, under the present organization of society, for the 
creation and accumulation of capital. 

30. Nature of Capitalistic Production 

Advantages of indirect production. — Production without 
the aid of capital, which in this connection we will call direct 
production, is primitive in its very nature. The early pioneer, 
in Iowa let us suppose, quenched his thirst for the first few weeks 
by lying prone to drink from a natural spring. Obviously, 
under these conditions, he found it necessary to visit the spring 
each time he felt the need of a drink. This was direct pro- 
duction in its simplest form. Suppose, to continue the illus- 
tration, he spent an hour fashioning some sort of vessel from 
bark or clay that would contain enough water for the day, and 
that thereby he saved ten of the twenty minutes which he had 
formerly consumed daily in walking to and from the spring. 
Suppose further that by the expenditure of one day's labor he 
contrived a system of pipes made from wild cane which would 
carry a continuous flow of water to his cabin door, and which 
would relieve him of any further labor in getting water from the 



CAPITAL AS A FACTOR IN PRODUCTION 



133 



WOOLEN GOODS 



spring. Each step shows the advantage of indirect production. 
In the first, the hour's labor was made good in six days ; in the 
second, in a few months at most. So it is throughout all the 
productive processes. The time spent in fashioning tools and 
machines ordinarily yields an amount of goods in excess of the 
amount which would have 

been produced had it been Percentage of Total Value of Prod- 
,. V . 1 ,• ucTS for Leading Industries: 1909. 

spent m direct production. 

It is necessary to qualify 
our conclusions with the 
word " ordinarily," for it 
is easily conceivable that 
there are limits to the ad- 
vantages of indirect pro- 
duction. If our Iowa 
pioneer had spent days 
in embellishing his water 
pipe with shells and 
beads, there is no reason 
to believe that it would 
have served its purpose 
any better. Furthermore, 
whether or not the in- 
direct method of produc- 
tion of any particular good 
holds an advantage over 
more direct methods, de- 
pends in part on the avail- 
ability of labor. In the oriental countries, where labor is 
plentiful and cheap, it is often more advantageous in trans- 
porting merchandise to employ men than automobile trucks. 

The place of capital in modern industry. — Since the in- 
direct, or capitalistic, method of production is ordinarily more 



AUTOMOBILES 




134 ELEMENTARY ECONOMICS 

advantageous than the direct method, it characterizes, as we 
might expect, modern industry, with its enormous capital, its 
highly developed division of labor, and its complicated tools and 
machinery. Few business men would care to attempt to carry 
on production of any kind by direct methods. One of their 
chief concerns is to control sufficient capital for their business. 
Even farming, which we are still likely to regard as being carried 
on more or less directly, has felt the need of more and more 
capital to be expended for fertilizers, machinery, and buildings. 
Indirect production has had its highest development in manu- 
factures. In another connection we have seen how, under 
conditions of excessively large production, complicated and 
costly machinery has gradually displaced many of the simpler 
direct processes. Such displacements do not occur by accident, 
and would not occur at all if capitalistic production in these 
particular cases were not more efficient than direct methods. 
After all, the final test is efficiency and profitableness; for the 
producer, seeking his own economic advantages, will employ 
those methods which appear to him to be the best. For that 
reason, capital has come to dominate modern industry ; and we 
may expect it to enjoy an increasing dominance until the limits 
of indirect productive methods are reached. 

31. Different Kinds of Capital 

Fixed and circulating capital. — Capital may be classified in 
a variety of ways, two of which concern us here : fixed and 
circulating, in which time is the important element; free and 
specialized, in which the use element is the chief factor. 

It is a well-known fact, which can easily be verified by 
observation, that some forms of capital — that is, certain kinds 
of capital goods — are consumed more quickly than other forms. 
A piece of coal, for example, can be used but once. In other 
words, the only way to consume coal is to destroy it at a single 



CAPITAL AS A FACTOR IN PRODUCTION 135 

operation. At the other extreme are capital goods which can be 
used almost an infinite number of times before they are con- 
sumed. A common carpenter's handsaw has been known to 
survive fifty years' continual use. Some machines, too, last 
for years, successfully withstanding the wear and tear that 
comes from daily operation. To the coal we apply the term 
"circulating capital"; to the handsaw or machine we apply 
the term "fixed capital." It must be kept in mind, however, 
that both terms are relative, for the highest form of circulat- 
ing capital is fixed for at least one operation, while no capital 
is so perfectly fixed as to last forever. 

The replacement fund. — The length of time and the number 
of operations that any piece of capital good lasts are of prime 
importance relative to its replacement fund, which is the capital 
that must be accumulated to provide for wear and tear. Let us 
suppose that a factory equipped with ten machines consumes 
five tons of coal daily. At the close of the day the five tons of 
coal, having been consumed, will need to be entirely replaced. 
The machines, on the other hand, possessing a relatively high 
degree of fixity, are ready for the next day's work. Thus, day 
after day the coal supply is replenished, while the machines 
with only minor repairs may last for years. Each day the 
enterpriser finds it necessary to set aside a replacement fund 
large enough to buy five tons of coal, while the replacement fund 
necessary to cover the wear and tear of each machine may be but 
a few cents. If we should view the whole factory, we would 
find that every piece of equipment and bit of raw material con- 
sumed in making finished products are more or less fixed in their 
nature and more or less circulating, some being consumed with 
a single operation, some lasting for years, but all provided for 
in the replacement fund. 

It is well to remember in this connection that it is the replace- 
ment fund which permits the shifting of capital from one group 



136 ELEMENTARY ECONOMICS 

of industries to another. We have already noticed that the 
American industrial revolution was characterized by a change 
from commerce to manufactures. Obviously, the owners of 
ships could not utilize such forms of capital goods as hulks, 
sails, masts, and anchors in the making of cloth. They did, 
however, have available replacement funds which they had 
accumulated in the form of money to replace the vessels as they 
became unseaworthy. Thus, the owner of an old ship that was 
almost worn out had a relatively large replacement fund, while 
at the other extreme was the owner whose vessel had not even 
yet made its maiden voyage. The enterpriser, therefore, has, 
or ought to have, a replacement fund at all times, its relative 
size depending, among other things, on the condition of his 
equipment — that is, as business men say, on the state of repairs. 

Free and specialized capital. — Here again, as in the case 
of fixed and circulating capital, we are compelled to deal with 
relative terms. No capital is entirely free, and only on rare 
occasions do we find capital so highly specialized as to be en- 
tirely worthless for any other use. Free capital may be defined 
as capital which serves a variety of uses ; specialized capital, as 
capital which serves but few uses. For purposes of illustration 
take two common farming implements. The plow is used in 
preparing the ground for all kinds of crops, while the hay rake 
is practically worthless in gathering any other crop. For the 
sake of convenience of expression we call one free capital, the 
other specialized capital. Sometimes, however, capital is said 
to be free when it can be used for entirely different purposes. 
Coal, for example, may be used to generate steam, or to heat a 
building, while it is improbable that a second use could be 
found for a nutmeg grater. 

There is a close relation between free and specialized capital 
on the one hand, and the rate of interest on the other. Free 
capital, as a general rule, earns a lower interest rate than does 



CAPITAL AS A FACTOR IN PRODUCTION 137 

specialized capital, simply because the risk of losing the invest- 
ment is less. Suppose two men contemplate the expenditure 
of equal amounts of money in two buildings, one a store build- 
ing adaptable to almost any kind of merchandising, the other a 
moving-picture building with highly decorated interior, with a 
stage, and with an elevated floor. Plainly the risk involved, 
other things being equal, in getting tenants wotild be less in the 
case of the first building than in the case of the second. The 
first could be utilized in various ways ; the second, unless 
extensive alterations are made, is likely to prove useless for 
any purpose other than moving-pictures. Knowledge of these 
facts causes investors to demand a higher interest rate in one 
case than in the other, and in the long run they secure their 
demands. 

Gold is not a free capital good. — Because of its universal 
acceptability gold is often mistakenly spoken of as free capital. 
Such is not the case, however, in the sense in which we have 
just used the word " free." Aside from its utilization in 
jewelry and watch cases and in dentistry we seldom in our every- 
day experiences see gold used as a capital good ; compared with 
iron or copper the number of ways in which it can be utilized 
is small. For that reason it is specialized rather than free. 
It has, however, a high degree of exchangeability, since, as we 
have seen, it flows freely from hand to hand because it is univer- 
sally desired. 

Individual and social capital. — In our ordinary thinking we 
seldom go beyond the notion of individual capital — that is, 
capital possessed and directed by individuals. Society, also, 
has considerable capital which is of no small amount and im- 
portance. Factories and department stores install automatic 
sprinklers, which we agree at once is capital. Sprinklers lessen 
the fire hazard. So does the city fire department with its 
heavy investment in buildings, trucks, ladders, and other equip- 



138 ELEMENTARY ECONOMICS 

ment. Both serve the same purpose ; both represent capital 
investment, one by individuals, the other by society. In extend- 
ing this notion we find, for example, that goverrmient buildings 
with their furnishings and equipment parallel individual capital 
investments designed to furnish the same or similar services, 
and as such they are capital. 

EXERCISES AND PROBLEMS 
A 

1. What was the origin, of capital? 

2. Name the three steps necessary to create capital. 

3. Are any individuals or groups unable to take these steps? 
Expiain. 

4. Which is the more useful member of society, a miser or a 
spendthrift ? 

5. Why is capitalistic production said to be roundabout or indirect? 

6. What are the advantages of indirect production over direct 
production? 

7. How does the replacement fund give mobility to capital ? 

8. Explain how a carpenter's hammer replaces itself. 

9. What has become of the large amount of capital formerly used 
in the buggy and carriage industry? 

10. Is any capital completely fixed? Explain. 

11. Where should the line be drawn between fixed and circulating 
capital? between free and specialized capital? 

12. Why should specialized capital yield a larger income than free 
capital ? 

13. Just why is gold a highly specialized form of capital? 

14. Name some forms of social wealth. 

B 

1. CaU to mind persons in your community who contribute to the 
supply of capital. 

a. Are all of them relatively well-to-do ? 

h. Which, if any, appear to sacrifice unduly in order to save? 

c. Which are normally thrifty? 

d. Have any adopted definite plans for saving? 

e. What advice has any of them to offer in the matter of saving? 



CAPITAL AS A FACTOR IN PRODUCTION 139 

2. Imagine, if you can, a general return to direct methods of pro- 
duction. 

a. How would civilization be affected? 

h. Would the volume of production be greater or smaller? 
Explain. 

c. Would individuals and groups be more or less self-sufficing? 

Explain. 

d. Would people have more or less leisure time? Why? 

e. How would such a change affect public education ? 

/. Name some industries that would be likely to suffer the 
most. 

3. Many tasks, such as digging ditches, cleaning streets, and carry- 
ing brick and mortar, are iisually performed by direct methods. 

a. Could capitalistic methods be employed? How? 
h. Why are they not usually employed? 

c. Under what conditions are they sometimes employed? 

d. Does there appear to be any relation between capitalistic 

methods and the law of diminishing returns? Explain. 

4. Classify the capital in some industry with which you are familiar 
into free, specialized, fixed, and circulating. 

5. Suppose a certain individual invests $10,000 in a store site and 
building ; also an equal amount in another site and building utilized 
by the state as an armory for a company of militia. Which should 
normally earn the larger return? Why? 

6. Prepare a list of various forms of social capital. Show how each 
item in the Ust lessens the need for greater individual wealth. 

C 

1. "The corporative form of industry has been a big factor in the 
saving and investing of capital." Explain with some detail how this is 
true. 

2. Socialists usually claim that labor is the source of all wealth. 
a. Can wealth be created without labor? How? 

6. Can capital create wealth without the assistance of labor? 

How? 
c. How would the destruction of all wealth affect the efficiency 

of labor? 

3. "With the extension of capitalistic methods of production the 
proportion of fixed and specialized capital goods shows a tendency to 
increase." 



140 ELEMENTARY ECONOMICS 

a. Is this statement true? 

h. Why is it true? 

c. Why, or why not, is this proportion likely to increase? 

d. Under what conditions might it decrease? 

SUPPLEMENTARY READING 

Bullock, Introduction to the Study of Economics, 3d ed., pages 131-141. 
Ely, Outlines of Economics, 3d ed., pages 119-122. 
Fisher, Elementary Principles of Economics, pages 37-59. 
Johnson, Introduction to Economics, pages 192-214. 
Seager, Principles of Economics, pages 140-152. 
Seligman, Principles of Economics, 5th ed., pages 313-328. 
Taussig, Principles of Economics, 2d ed.. Vol. I, pages 67-85. 



CHAPTER XI 

COMPETITION VERSUS MONOPOLY 

32. Impetus of Competition 

The doctrine of laissez faire. — Business men and public 
officials for centuries held the view that business could best 
be conducted if minutely regulated by the government. To that 
end the various nations granted monopolies of all sorts, regulated 
the relation between masters and their workmen, and restricted 
the exportation of money and raw products to foreign lands. 
This was the period of mercantilism — that is, a period of state 
regulation of business. There were some leaders, however, who 
believed that state interference was more detrimental than 
helpful, and that better industrial results could be attained by 
permitting each individual to pursue his own economic advan- 
tage. The first widely-read expression of this new doctrine, 
the doctrine of laissez faire, was given to the world by Adam 
Smith, in 1776, in an epoch-making work entitled the Wealth of 
Nations. 

Since that time these two conflicting views have contested 
for supremacy in the minds of men. Mercantilism — state 
regulation of business — has stubbornly given way to its 
younger rival, though it still lingers in such form as the pro- 
tective tariff ; and it would not be at all surprising if it should 
regain its second youth. We may say, however, that business 
in general in the United States is characterized by the principle 
of laissez faire, or, to use a more common expression, competition. 
Here each business man is permitted, with a minimum of state 

141 



142 ELEMENTARY ECONOMICS 

Fac-simile Extract from Smith's Wealth of Nations. 



AK 

INQUIRY INTO THE NATURE AND CAUSES 

OP THE 

WEALTH OF NATIONS. 



BOOK I. 
CHAPTER XI. 

Of the Rent of Land. 



Rent, considered as the price paid for the use of 
land, is naturally the highest which the tenant can 
afford to pay in the actual circumstances of the land. 
In adjusting the terms of the lease, the landlord en- 
deavours to leave him no greater share of the pro- 
duce than what is sufficient to keep up the stock 
from which he furnishes the seed, pays the labour, 
and purchases and maintains the cattle, and other 
instruments of husbandry, together with the ordinary 
profits of farming stock in the neighbourhood. This 
is evidently the smallest share with which the tenant 
can content himself without being a loser, and the 
landlord seldom means to leave him any more. 
"Whatever part of the produce, or, what is the same 
thing, whatever part of its price, is over and above 

VOL. H. B 



COMPETITION VERSUS MONOPOLY 143 

interference, to decide his own policy, to buy and sell to the best 
advantage, and to conduct his business as he thinks advisable. 
Here the state makes no effort to regulate his business activities 
so long as public welfare is not endangered. Under normal 
conditions it has no concern with the details of his business, 
with the source of his raw materials, with the volume of his 
output, or with the prices of his product. Consequently, any 
one in the United States can move about at his convenience, 
seek employment anywhere, and engage in almost any business 
for which he is equipped. 

Competition and improvement. — The chief economic argu- 
ment for competition is that it serves as the basis of business 
improvement and business development. Who has not heard 
the common saying, "Competition is the life of trade"? 
Spurred on by competitors the business man seeks better sources 
of raw materials, better methods in production, and better 
markets ; which in almost every case means higher quality and 
lower prices. Under the pressure of competition he substitutes 
new and better methods for old ones, and if he is to succeed, he 
must not only be alert to the improvements of his competitors, 
but also he must on his own initiative institute improvements 
of his own. 

The business world is literally alive with industrial improve- 
ment. Large manufacturers maintain expensive laboratories 
where their competitors' products as well as their own are 
carefully tested for excellence ; where experiments are carried 
on with the single purpose of improvement. Railroads, too, are 
alive to any change that will improve their service. Competing 
lines fight for supremacy in the matter of speed, of comfort, and 
of safety. They employ high-priced engineers to study the pull- 
ing power of engines, the effect of speed on rails and roadbed, 
and the advantages to be gained by straightening tracks and 
cutting down grades. They experiment with different kinds of 



144 ELEMENTARY ECONOMICS 

fuel, and with different makes of engines and cars. Even 
among farmers competition leads to improvement in the quality 
of seed, in cultivation, in stock-raising, in harvesting, and in a 
variety of other ways. For most of us the best examples of the 
influence of competition on improvement are found in the retail 
trade. One grocer installs a large sanitary refrigerator, another 
replaces his old horse-driven delivery wagons with automobile 
trucks, while a third makes arrangements to permit his cus- 
tomers to wait on themselves as far as possible. At the bottom 
of each change is the desire to get more business. The first 
has an advantage in handling perishable goods, the second cuts 
the expense of delivery, while the third is able to reduce his 
number of clerks. In the end many other grocers, unwilling to 
be bested by competitors, adopt these innovations. Thus in 
its endless round industrial improvement goes on its way stim- 
ulated by the force of competition. 

Wastes of competition. — Competitive methods often show a 
loss, however, which society should, and will in time, eliminate. 
Spurred on by a desire to increase trade, competitors sometimes 
uselessly duplicate plants and equipments, with the result that 
society must pay more for their particular goods than would 
otherwise be the case. Delivery of milk in cities is a common 
example of this waste. Not infrequently as many as a half 
dozen milk drivers visit the same apartment house in the course 
of the early morning hours, the combined service being little 
greater than that which one driver could have rendered in the 
same time. Recent investigations of the conditions surrounding 
the delivery of milk in a large Middle Western city disclose the 
interesting fact that the cost of delivery from city milk stations 
to the homes is greater than the combined cost of producing the 
milk and shipping it to the city. We may see similar wastes in 
a duplication of small stores, each with its staff of clerks and 
its delivery system working but part time. 



COMPETITION VERSUS MONOPOLY 145 

Society has already made much progress in the matter of 
waste prevention, by facing squarely the fact that some indus- 
tries by their very nature are monopolistic in character and not 
competitive. As a result few cities have duplicate water 
stations, electric lighting systems, or artificial gas plants. 
Usually also one street railway system suffices. Competition 
between telephone systems still persists in some localities. 
Obviously, the duplication of an electric lighting system would 
be a social waste, especially if some means other than competi- 
tion can be made an effective regulator of service and price. 
Such means have been found in positive legislation in which the 
benefits of competition are gained without the loss arising from 
duplication of plants, equipment, and labor force. 

33. The Law of Monopoly Price 

Getting the largest net return. — The feeling prevails that a 
monopolist will always sell his goods at the highest price. On 
the contrary, he sells them at that price which brings him the 
largest net return, whether that price be high or low. He is 
concerned not only in price, but also in the number of units sold. 
In pursuing his economic advantage, therefore, he would set the 
price with due regard for demand ; for, as we have already 
learned, an increase in price lowers demand while a decrease 
causes demand to rise. 

The operation of the law of monopoly price is best observed 
in connection with goods which have an elastic demand ; and 
which are produced under conditions of decreasing costs — 
that is, under conditions in which the unit cost of production 
decreases as the number of units produced is increased. Assum- 
ing, for illustrative purposes, that the manufacturer of a certain 
brand of toilet soap is a monopolist, we can work out concretely 
his problem of fixing the price. 



146 



ELEMENTARY ECONOMICS 



No. OF Cakes 
Sold 


Cost per 
Cake 


Gross Cost 


Selling 

Price per 

Cake 


Gross 
Receipts 


Net Profits 


20,000 


20^ 


$ 4,000 


80^ 


% 16,000 


$12,000 


50,000 


18f5 


9,000 


50^ 


25,000 


16,000 


100,000 


15fi 


15,000 


40^ 


40,000 


25,000 


300,000 


14?; 


42,000 


2H 


75,000 


33,000 


1,000,000 


10^ 


100,000 


15?i 


150,000 


50,000 


3,000,000 


8^ 


240,000 


10^ 


300,000 


60,000 


5,000,000 


7<t 


350,000 


8^ 


400,000 


50,000 


8,000,000 


^i 


520,000 


H 


480,000 


40,000 (loss) 



An examination of these figures shows that our soap monop- 
olist would fix the selling price at 10 cents, not because that 
was the highest price he could get nor because he could sell the 
largest number of cakes at that price, but rather because at 
that price he can reap the greatest reward. 

A second consideration which the monopolist must keep 
clearly in mind is that his monopoly consists in controlling the 
supply and not the demand — that is, that he has no control 
over demand except through price. Consequently, a monop- 
olist must take care in fixing the price of his good, for if he 
places it too high his entire output will not be demanded ; 
if too low, he loses profit. Occasionally, a monopoly, like the 
South African Diamond Company, is so secure in its dominating 
position as to be able to withhold, if prices are too low, portions 
of its products from the market. Such a practice, however, 
would be impossible among most monopolists, for the simple 
reason that competition might arise or the goods withheld 
might decay. We may conclude, then, that the mere fact that 
a certain good is in the hands of a monopolist is not conclusive 
proof, as most people think, that the good will command a 
higher price than if in the hands of numerous competitors. 



COMPETITION VERSUS MONOPOLY 147 

Supplying different demands. — It often happens that a 
monopolist can, by changing slightly the character of his prod- 
uct, supply different demands at different prices. Recurring 
to our soap manufacturer, let us suppose that instead of making 
only one kind, as we have assumed, he makes five kinds differing 
only in shape, color, or scent. It is entirely probable that he 
could sell his output at five different prices ; those most highly 
scented, let us say, at the highest price, and so on down until 
the lowest price is reached with the unscented cakes. More 
familiar illustrations of this principle are found in the publi- 
cation of certain kinds of books. Ordinarily, the earlier editions 
of books of fiction are sold at high prices. Later so-called 
popular editions are issued at half price or even less. The 
reading material is exactly the same, and occasionally no great 
change is made in the quahty of paper or binding. Publishers 
know that there is a demand for the book at the standard 
price. They know also that many readers do not have demands 
at that price. Hence they supply each demand successively, 
beginning at the top, unless, as is sometimes the case, they make 
a show of supplying several demands at once by issuing different 
editions that appear to be very much unlike in printing and 
binding. Any peddler knows that in many cases the only way 
to sell an article at a discount to one housewife without losing 
the custom of her neighbors is to mar it in some manner so as 
to decrease its apparent utility. To use a common business 
expression, '' one of the tricks of the trade " which the monop- 
olist must learn is to be able to classify rather accurately the 
different demands for his product and to meet these demands. 

34. Limitations on Monopolists 

Dangers from competition. — It would be incorrect to gain 
an impression from what has just been said that the monopolist 
has nothing to fear, or that he can always fix a price that will 



148 ELEMENTARY ECONOMICS 

bring him the largest net reward irrespective of outside in- 
fluences. Three limitations tend to keep the monopolist from 
going beyond reasonable bounds in dealing with the public : 
(1) competition, (2) substitution, (3) legal interference. 

No monopolist is ever free from the dangers of competition, 
and the more excessive his exactions the greater the danger. 
In a highly developed industrial country like the United States, 
capable business men are constantly on the alert to engage in 
profitable undertakings. They quickly sense the source of 
high returns, and no risk is too great for them to take if the 
promised reward is sufficiently large. The history of American 
industry furnishes numerous examples of successful attempts on 
the part of competing enterprisers to secure trade from monop- 
olies; and oftentimes these struggles between giants have 
developed into bitter trade wars featured by excessive price- 
cutting. At one time the sugar trust found its way blocked by 
a combination of independent refineries ; the history of the 
Standard Oil Company is characterized by its struggles with 
independent rivals ; while the steel trust has found effective 
competition at the hands of the Bethlehem Steel Company. 
No monopoly, whatever its financial strength and prestige may 
be, is justified in feeling its position to be secure against success- 
ful competition, for a new invention or some other unforeseen 
occurrence may give a watchful rival an opportunity to secure 
a portion of its business. 

Dangers from substitution. — Monopolists must also take 
into account the power of consumers to substitute one good for 
another. Usually as the price of a good rises, those consumers 
who are on or near the margin cast about for a substitute, since 
it is but a question of time, if prices continue upward, until 
their demand for that particular good will be nothing more than 
a desire ; that, is, their demand will have lost its effectiveness. 
Examples of the substitution of one good for another because of 



COMPETITION VERSUS MONOPOLY 149 

a rise in price are numerous and easily found, particularly in 
the matter of food and clothing. Who has not seen a sub- 
stitute for butter, for eggs, for leather, or for furs? The first 
year of the Great War taught Americans more about substitutes 
than they had ever known before. Until that time millions of 
people were scarcely more than on speaking terms with bread 
made of corn meal, few knew the possibility of molasses for 
sweetening purposes, while scarcely one had ever dreamed that 
honey could be made from milk. Aside from government 
requirement, the chief cause for these substitutions was high 
prices, and here, as is always the case, " necessity was the mother 
of invention." 

Substitution and competition as checks on monopolies cannot 
be entirely divorced. Independent enterprisers are eager, not 
only to attack the monopolist directly in his own field, but also 
to attack him indirectly by offering his customers substitutes. 
Thus, cement manufacturers, in so ar as their product is a 
substitute for iron and steel, compete just as truly with the steel 
trust as does the Bethlehem company ; and they in turn must 
meet the competition of manufacturers of artificial plaster 
board. The methods adopted by manufacturers of substitute 
goods to push their product are significant. The maker of an 
egg substitute, for example, is not content to declare that his 
product is equal in every respect to fresh eggs. He goes further, 
by placing in the hands of housewives all sorts of cooking recipes 
in which the egg substitute can be used to advantage. 

Dangers from government regulation. — A monopolist still 
has cause to worry even though he be secure from competitors 
and his product be free from the competition of substitutes. 
Despite the doctrine of laissez faire, society through -government 
sets limits beyond which monopoly may not go. It undertakes, 
when all other methods have failed, to curb exorbitant rewards 
and unfair practices. In fact, as we have already seen, the 



150 ELEMENTARY ECONOMICS 

people of the United States have firmly concluded that there is 
no possibility of some industries being regulated eit'^er by 
competition or by substitution. Accordingly, in these cases the 
people have turned to government regulation. For many years 
the opinion prevailed in the United States that the best way to 
control a railroad was to encourage the building of competing 
lines. In time it was seen that such a plan was not only in- 
adequate but also undesirable. Then it was proposed that the 
government should provide, not competing railroads, but sub- 
stitute transportation lines in the form of canals. This too was 
put aside as impracticable. Then society met the issue squarely 
by declaring that the government alone possessed the power to 
compel the railroads of the country to conduct their business so 
as to furnish efficient and reasonably priced service. 

While the regulation of railroads is the most outstanding 
example of the government's power in this respect, it has 
been effectively exerted against the trusts. And there is no 
reason to believe, should occasion arise, that the federal govern- 
ment would hesitate to exert its authority against any other 
monopolies. Because of past experiences and future possibilities, 
monopolists are wise to conduct their business somewhere near a 
competitive basis. 

Concealment of monopolistic returns. — As we might expect, 
the monopolist fearful of attack from these directions often 
attempts to hide excessive returns. He may pay himself, and 
even to relatives, salaries out of all proportion to the market 
value of their abilities. Or, as is more often the case, he can 
inflate the capital stock of his business in order that it may 
appear to be earning but a nominal return, whereas the return 
based on the actual capital investment may be excessive. Or 
again he may organize dummy corporations to which he pays 
large amounts of money for some trifling service. Whatever 
method he may employ, the end in view is the same : the 



COMPETITION VERSUS MOlsiOPOhY 151 

concealment of excessive returns which might tempt competitors 
or the government to step in and force a reduction of prices. 

EXERCISES AND PROBLEMS 
A 

1. What is the difference between laissez faire and mercantilism? 

2. Why should the government desire to regulate industry? 

3. Who was Adam Smith? 

4. Why is he often referred to as the "father of economics"? 

5. What is the relation between competition and industrial im- 
provement ? 

6. What are some of the wastes of competition? 

7. State the law of monopoly price. 

8. Why is the monopolist primarily concerned with the largest net 
return? 

9. What limitations are placed on monopoly price? 

10. How does a monopoly come into existence? 

11. Is monopoly synonymous with big business? 

12. Which monopolist would have the most power in fixing price, 
and why : 

a. The one dealing in necessities? 
6. The one dealing in luxuries? 



1. Notice carefully how several competing retailers in the same 
line carry on their businesses. 

a. Which has the best site? 

b. Which has the largest stock of goods? 

c. Which has the most attractive window displays? 

d. Which has the most efficient delivery system? 

e. Which advertises the most extensively? 

/. Why does not some one of them combine all these good points 

in his business? 
g. What would be the result if he did so? 

2. Observe the wastes of competition in retailing arising from dupli- 
cated efforts in the matter of delivery, advertising, rents, lighting, 
and heating. 



152 ELEMENTARY ECONOMICS 

a. Suggest ways to eliminate any of these wastes. 

h. Would you suggest government regulation? Why, or why 

not? 
c. What attempts are being made in your community to eliminate 

wastes of competition? 

3. Do you know of any former competitive industry that is now 
monopolistic? If so, did the change affect prices? How? 

4. Make a list of former monopolies which do not now exist. 
a. Did they become insolvent? If so, why? 

h. Did they change to competitive conditions? W^hy? 

5. Suppose you were a watchcase manufacturer. 

a. At what point would you fix the price of your product ? 

h. Would you manufacture different grades of watchcases? 

Why, or why not? 
c. How would you meet any competition that might arise? 

6. Suppose you conducted a monopolistic business with a capital 
of $100,000. If your net income from the business was $75,000 a year, 
how could you make the return appear to be much less? 

C 

1. Discuss the common saying that "competition is the life of 
trade." 

2. "The monopolist has it in his power to fix prices at whatever 
point it suits his fancy." 

a. May the monopolist ignore demand ? Explain. 
h. Can the monopolist control demand ? Explain. 

c. Are high prices alway the most advantageous to the monop- 

olist? Why, or why not? 

d. Does the elasticity of the monopolized good affect the monop- 

oly price? 

e. Would a wheat monopolist and a diamond monopolist be 

governed by the same consideration? 
/. In what three ways is the monopolist restricted in his price- 
making? 

3. Suppose a manufacturer of talking machines should absorb his 
competitors. 

a. What would be the effect on production? 

h. How would prices be affected? 

c. Would new competitors be likely to arise ? Why ? 



COMPETITION VERSUS MONOPOLY 153 

4. "A moziopoly is often advantageous to consumers, for prices are 
less than they would be under competitive conditions." How can this 
be true? 

5. The belief generally prevailed a few years ago that any manu- 
facturing monopoly was sure to succeed. 

a. Account for this belief. 

b. Has experience justified this belief? Explain. 

c. What factors were overlooked by those who held this belief? 

d. How has the attitude of society toward monopolies changed? 

SUPPLEMENTARY READING 

BuLLOCE, Introduction to the Study of Economics, 3d ed., pages 315-342. 

Ely, Outlines of Economics, 3d ed., pages 189-211. 

Fettek, Ecojiomics, Vol. II, pages 427-456. 

Seager, Principles of Economics, pages 198-228. 

Seligman, Principles of Economics, 5th ed., pages 139-153, 337-350. 

Taussig, Principles of Economics, 2d ed., Vol. I, pages 199-297. 



CHAPTER XII 
TRANSPORTATION 

35. Stages in the Development of Transportation in 

THE United States 

Natural waterways. — The first settlers in the English colonies 
came by way of the sea, and here they found a land blessed with a 
coast admirably adapted to navigation. Also, as they became 
acquainted \\-ith the interior, they found numerous navigable 
streams which took their rise in the Alleghenies and flowed 
gently to the sea. Some were so broad and inviting to ocean- 
going ships as to apjDear more hke arms of the sea than rivet's. 
The Connecticut, the Hudson, the Delaware, the Potomac, 
the James, the Savannah, and many others, each drained great 
stretches of fertile land or penetrated deep into the fur countrA*. 
Very soon, as we might expect, numerous settlements were 
planted along their banks, and then they became important 
arteries of trade and travel. 

As soon as the settlers had pushed across the moimtains west- 
ward they found themselves again favored by nature ; for before 
them lay one of the finest river systems in existence, also a 
chain of navigable lakes unsurpassed in the whole world. Further 
south a great number of short streams emptied into the Gulf. 
Soon the Ohio became the great natural highway to the West, 
while the completion of the Erie Canal in 1S25 opened the lakes 
to active na\'igation. Again, as in the colonial days, the 
settlers depended much on these waterwaj's ; and naturally so, 

164 



TRANSPORTATION 155 

for they were gifts of nature waiting to be utilized by the 
possessors of even the crudest and cheapest craft. 

River navigation perhaps played a relatively less important 
part in the settlement of the territory west of the Mississippi, 
yet without rivers the development of those regions would have 
been materially retarded. The Red, the Arkansas, the Mis- 
souri, and the tributaries of the upper Mississippi each formed 
important links in the movement to the Far West. Up these 
streams pushed thousands of settlers who would have been 
unwilling or unable to- undertake the journey by land. 

Wagon roads. — As settlement spread there arose a demand 
for wagon roads, which the colonial governments ordinarily met 
by compelling each householder to expend a certain number of 
days' labor yearly on the public highways. Usually these 
highways were little more than widened bridle paths or Indian 
trails, impassable except under the most favorable circum- 
stances. Later the frontier states provided for elaborate 
systems of wagon roads, many of which never got beyond the 
projection stage. Aside from a few roads which connected 
the more important settlements, early state enterprise seems 
to have done little for the construction of permanent wagon 
roads. The farthest advances in this direction were made by 
state-incorporated turnpike companies. These companies had 
a direct interest in encouraging travel over the wagon roads 
which they controlled. Consequently, they constructed them 
with considerable care, often laying down stone, logs, or sawed 
timbers, and kept them in good repair. In return for the 
expenses thus incurred, the companies were authorized to charge 
tolls. Wagon roads, it was soon seen, were too intimately 
bound up with the welfare of society to permit private individuals 
or corporations to fix charges and lay down regulations for their 
use. Consequently, the turnpike companies were compelled 
one after another to relinquish their control over highways. 



156 ELEMENTARY ECONOMICS 

Canals. — Simultaneously with the building of turnpikes 
was the construction of artificial waterways known as canals. 
The former method was not, as some writers have stated, a 
forerunner of the latter. Nor was it expected that these two 
systems of transportation should compete, since canals would 
necessarily be restricted by nature to a few localities. It would 
be more logical and closer to the facts to say that during the 
mania for canal-building the people of the United States 
regarded them merely as great trunk lines of commerce and 
communication toward which wagon roads of every description 
would naturally converge. 

The first great success in canal-building in the United States 
was the Erie Canal, begun in 1817 and opened to navigation 
in 1825. Spurred on by a desire to share with New York City 
the prosperity of the western trade, Philadelphia and Baltimore 
persuaded their respective states to project similar enterprises. 
Soon the canal craze spread westward. Ohio built two, 
connecting Lake Erie and the Ohio River ; Ohio and Indiana 
combined to join Lake Erie to the Ohio River at Evansville ; 
while Illinois, with a much simpler task than either Ohio or 
Indiana, built the Illinois-Michigan Canal, connecting the 
Illinois River and Lake Michigan. It is safe to say that every 
one of these canals had a beneficial influence on the settlem.ent 
of the Middle West, though none of them lived up to the expecta- 
tion of its more optimistic supporters. They failed, not neces- 
sarily because they were poorly constructed or poorly located, 
but only after the railroad had demonstrated its superiority as 
a means of transportation. 

Railroads. — The railroad history of the United States may 
be said to have begun in 1830 with the opening of the Baltimore 
and Ohio to traffic. After many experiments in respect to 
roadbed, rails, engines, and cars, both on this line and on other 
early lines, there was evolved a distinctively American railroad. 



TRANSPORTATION 



157 



During the earlier years progress was slow. In 1830 the total 
number of miles in the United States was twenty-three. In 1840 
the number was almost three thousand. From that time on 
growth was more rapid, the total mileage for the whole country 
in 1860 being in excess of thirty thousand. During the Civil 

Railroad Mileage in the United States : 1830-1915. 
(In thousands of miles.) 



1830 
1835 

1840 

1845 

1850 

1855 

1860 

1865 

1870 

1875 

1880 

1885 

1890 

1895 

1900 

1905 

1910 
1915 




































































































/ 


/ 






























/ 


/ 


























J 


/ 
































/ 






























^y 


/ 




























y 


y 


f^ 
























^ 








■ 



















In 1830 THE Total Mileage was 23 ; in 1840 it was 2818. 



War neither government made notable headway in railroad 
construction. The return of peace, however, started activities 
anew with the result that a mania for railroad-building spread 
over the country, particularly in the West and Far West. 
Soon after 1880 the total mileage passed the one hundred thou- 
sand mark, the average annual increase exceeding ten thousand 
miles. Later, the building of new lines gradually gave way to 



158 ELEMENTARY ECONOMICS 

the extension and consolidation of old ones, until at the present 
time a relatively few organizations control the through traffic in 
the United States. 

Recent tendencies. — Owing to a number of disconnected 
causes — to the inability of the railroads to handle readily all 
of the freight offered, to improvements in automobiles, and to 
the use of cement for road-building — more attention than 
ever before is now being given to water and wagon-road traffic. 
Thinking people are becoming convinced that the United States 
should no longer neglect the natural transportation facilities 
furnished by the Mississippi River and its tributaries. To that 
end the national and state governments, as well as individuals 
and corporations, are studying how these rivers may be used 
to the best advantage. The states, stimulated by the desire of 
owners of pleasure cars for an all-the-year-round service, are 
constructing hard roads. Already in some sections automobile 
trucks are carrying freight between neighboring cities. It is 
not too much to expect — in fact it has already been proved 
practicable — that the future will see the automobile an active 
competitor of railroads in hauling freight as well as passengers. 

36. Railroad Competition 

Railroads operate under the principle of diminishing costs. — 

Producing under conditions of decreasing costs, as has already 
been explained, simply means that the cost per unit declines 
with an increase in the number of units produced. Most 
manufacturers and retailers as well as a great many business men 
in other lines produce under these conditions, but none of them 
enjoy its benefits more than do railroads. 

It is a fact easily observed that a large part of the expenses of 
a railroad goes on day after day whether one train or a half 
dozen are operated. Its roadbed, depots, terminals, and much 
of its equipment must be maintained whatever the volume of 



TRANSPORTATION 159 

the traffic may be. Even a great deal of the expense incurred 
in the payment of wages is fairly constant. Thus, it is plain that 
the cost of handling additional traffic is in no wise proportionate 
to the increase in the traffic itself. Working under these 
conditions, railroad managers, as long as they were permitted 
to compete freely for business, were tempted to give large 
shippers the benefits of low rates ; but in doing so they opened 
the door to the worst abuses with which the railroad business 
has ever been cursed. 

Discriminations. — We have just seen how discriminations 
originated. We may now properly turn to a study of their 
nature and character. Briefly stated railroad discriminations 
may be grouped as follows : (1) discriminations among prod- 
ucts, (2) discriminations among localities, and (3) discrimina- 
tions among persons, firms, or corporations. Discriminations 
among products create less opposition than do discriminations in 
either of the other two cases, largely because they have not been 
widespread, and hence have affected few people. The best 
example is found in a comparison of wheat and flour rates from 
the upper lake region to the Atlantic seaboard. Not many 
years ago the railroads which connected those two sections of 
the country charged a very low rate on east-bound wheat and a 
correspondingly high rate on flour in the same -direction. The 
result was, so Minnesota millers claimed, that exporters pre- 
ferred to have their wheat; ground in the mills along the coast. 

Discriminations among localities have been more serious in 
that they have affected more people, and have created in the 
minds of the public a suspicion that the managers practicing 
these discriminations have profited financially. Discriminations 
of this character have usually taken form in favors granted one 
city and withheld from its rivals. Oftentimes the result has 
been prosperity for the one and stagnation for the others. No 
doubt if all the reasons for making this kind of discrimination 



160 ELEMENTARY ECONOMICS 

were known it would be found that they were many and varied ; 
yet the chief reason has usually been that the railroad making 
the discrimination had valuable property in the favored city. 

The most repulsive form of railroad discrimination is among 
persons, firms, or corporations ; for it violates all the rules of 
fair play by giving one competitor an unfair advantage over 
another. The worst offender in this respect seems to have 
been the Standard Oil Company, which, with its enormous 
wealth and influence, was able to force railroads to do its bidding. 
At one time this company compelled the railroads, not only to 
give it special rates on refined oil, but also to pay into its treas- 
ury a portion of the freight they collected from competing 
refineries. 

It would be misleading to close this discussion without call- 
ing attention to two pertinent facts. First, the various dis- 
criminations just noticed are now illegal and, let it be hoped, 
little practiced. Second, the railroads themselves were often 
unwilling partners in the discriminations, though it must be 
said on the testimony of expert railroad administrators that 
ordinarily it was more profitable to give one large shipper low 
rates in return for his entire business than to exact a higher 
rate from a number of smaller shippers who were at any moment 
likely to be won over by competing lines. 

Nature of railroad competition. — To understand the nature 
of railroad competition we must revert to an earlier section in 
this chapter in which the principle of doing business under 
conditions of diminishing costs was noted. Since the unit cost 
of handling additional freight or passengers is very small, 
competition among railroads, when it exists at all, is likely to 
be very bitter. For that reason it is known as " cutthroat " 
competition. Not many years ago two competing lines between 
Chicago and New York engaged in a memorable struggle for the 
traffic between those two points. Ridiculously low rates were 



TRANSPORTATION 161 

offered ; so low were they in fact that both raih'oads did busi- 
ness at a loss, thereby endangering their solvency. Finally an 
arrangement was made by which the two lines pooled their 
combined business, each getting a certain share determined in 
advance. The outcome of this struggle is illustrative of the 
way in which practically all railroad wars have been settled. 

37. Rate-making 

The principle of joint costs. — Since a large portion of a rail- 
road's expense goes on from day to day irrespective of the 
amount of its traffic, and since the same equipment is used to 
haul a variety of products, railroads find it profitable to do some 
of their business at a loss. Let us suppose that a certain line 
operates nine trains a day at a total cost of $4500, or $500 a 
train. According to our supposition, this cost includes every- 
thing. — operating expenses, interest on capital, and replace- 
ment fund. Let us suppose further that the entire additional 
cost involved in adding a tenth train would be $300, making the 
total cost for operating the ten trains $4800, or $480 a train. 
Can the railroad under these conditions afford to operate the 
tenth train if it earns less than $480? It can. Anything above 
the $300 extra cost involved in its operation would be clear 
earnings. 

Charging all that the traffic will bear. — Every railroad 
manager has faced such a problem, and we may now concern 
ourselves with his methods of solving it. Suppose he is called 
on to fix a rate for some product which his road has never 
handled before, and, to connect up our present illustration with 
the preceding one, that it is offered in quantities sufficient to 
demand an entire train daily, which we will call the tenth train. 
Clearly, our manager would ordinarily not be willing to make the 
trainload rate lower than $300 ; nor would he dare to set it at 
a figure so high as to cause the shipper to abandon the project 



162 ELEMENTARY ECONOMICS 

of shipping his goods. Here, then, are the extremes between 
which the manager may fix his rate ; and we may well believe 
that he fixes it as near the upper limit as possible ; that is, he 
charges all that the traffic will bear. 

Long and short hauls. — To a great majority of people the 
most inconsistent practice of railroads is to charge absolutely 
less per ton, or car, or train, for a long haul than for a short 
haul. Their reason for so doing becomes clear when one takes 
into account the principles of joint costs, and of all that the traffic 
will bear. The roads themselves properly claim that the rate 
which they set for the short haul is equitable ; and that, while 
they could not afford to Ifuild and equip a line merely to make 
the long hauls at a lower rate, they can and do make them at a 
profit simply because a great part of their expense must be 
met regardless of the volume of the traffic. It goes without 
proof that they would prefer the long haul at a higher rate ; 
which, however, competition with other lines and with water 
navigation compels them to forego in order to get the business. 

38. Government Regulation of Railroads 

Attempts of the states to regulate railroads. — The first 
serious attempts to regulate the railroads were made by the 
various states. Nothing was more natural, for many of the 
states had assisted financially in the building of railroads and 
all of the railroads operated under state charters. The chief 
thing the state tried to do was to regulate freight and passenger 
rates. The railroads on their part very generally resisted 
regulation : by testing the constitutionality of the various rail- 
road laws, by bringing pressure on legislatures to repeal ob- 
noxious laws, and by politely refusing to comply with the laws. 
Such actions merely hastened the day of effective railroad 
legislation, for they showed as nothing else could that the rail- 
roads, if allowed to carry out their policies, would place them- 



TRANSPORTATION 163 

selves above the law and the public. Unfortunately, many of 
the people, like the railroads, unwilling to allow the laws to 
take their course took matters in their own hands. They even 
went to the point at times of compelling individual train crews 
to collect rates and operate trains contrary to instructions from 
the managers. In the end some of the states established control 
over the lines within their boundaries ; but the control was only 
nominal, since they had no authority to say how interstate trade 
should be conducted, that being a power expressly delegated to 
the national government by the Constitution of the United States. 

The Interstate Commerce Act. — Since the states had no 
control over interstate commerce, it was plainly the duty of the 
federal government to enact a comprehensive law for the 
regulation of all commerce that crossed state boundary lines. 
Bills were introduced and discussed in both houses of Congress. 
Wide differences of opinion appeared, especially as to the best 
method of enforcing the regulation embodied in the proposed 
law. The final result was the Interstate Commerce Act of 1887. 

Among the provisions embodied in this act,^ six deserve 
mention at this point. (1) Discriminations, such as we have 
discussed in an earlier section of this chapter, were prohibited, 
under penalty of fine and imprisonment. (2) The act provided 
that interstate railroad rates should be just and reasonable. 
(3) To render provisions 1 and 2 effective, railroads were re- 
quired to make their rates public, and not to change them with- 
out due notice. (4) Railroads were prohibited from charging 
more for a short than for a long haul unless authorized to do so 
by the proper authorities. (5) Pooling was declared to be illegal. 
(6) The act provided also for an Interstate Commerce Com- 
mission, appointed by the president of the United States, which 
should direct the enforcement of the law. 

During the earlier years of the act the commission found it 
difficult to enforce the law. The first difficulty lay in the per- 



164 ELEMENTARY ECONOMICS 

sonnel of the commission itself, which, while it contained able 
men, served too often as a convenient place for retired members 
of Congress to spend their declining days. Second, the law 
itself, as an examination of its provisions shows, was largely 

A Portion of the Interstate Commerce Act. 

CHAP. 104— Am act to lOKulatc coiiiincrce. Feb. 4, 1SS7. 



J!v it ciioctcfl hi) the Unmte and House of Repfescntniives of the Unitefl 
Stalls of Ameiiua in Ccnt/ress ansvmblcd, That the jirovisions of tbi.s act lutcrstatc tout 
sliiill !ii)i)I.v to any coiuinoii carrier or carriers enjjayed in tbc trauspor- uierceroyulatiou* 
tatioii ol'i)assensers or property wliollj by railroa<l, or partly by railroad Ai>i>l"-"mou. 
and jjartly by water when both are used, under a coiuinon control, niaii- 
ai;einent, or arrangement, for a continuous carriage or shipment, from 
one State or Territory of the United States, or the District of Cohim- 
bia, to any other ijtate or Territory of the United States, or the District 
of Cuhunbia, or from any place in the United States to an adjacent for- 
eign country, or from any place in the United States through a foreigu 
country to any other place in the United States, and also to the traus- 
]iortation in like manner of property shi|)pedfroin any place in the United 
States to a foreign couutry and carried from such place to a portof traus- 
shipment, or shipped from a foreigu couutry to any place in the United 
States and carried to such place from a port of eutry either in the 
United States or an adjacent foreign country: Provided, hou-ever, That Proviso. 
the i)rovisious of this act shall not ai)ply to the transportation of pas- Not aiipli aMo 
seiigers or property, or to the receiving, delivering, storage, or hand- '". '■■""'c "'|''')>' 
ling of property, wholly within one State, aud not shipped to or from a """'" °"^' " •' ^• 
foreign country from or to any State or Territory as aforesaid. 

The term " railroad " as used iu this act shall include all bridges and "Railroad.'" 
feriies used or operated iu connection with any railroad, and also all "Tiausiioi ta- 
the road in use by any corporation operating a railroad, whether owned '^^ii„iti(,„ of. 
or operated under a contract, agreement, or lease; and the term "trans- 
portation" shall include all instrumentalities of shii)ment or carriage. 

All charges made for any service rendered or to be rendered in the Cliar-jcs ti. l/p 
transportation of i)asseiigers or i)roperty as aforesaid, or in connection rcasouabli.'. 
Jheiewith, or for the receiving, delivering, storage, or handling of such 
liroperty, shall be reasonable aud just ; aud every unjust an<l unreason- 
able charge for such service is prohibited and declared to be unlawful. 

Sec. L'. That if any-common carrier subject to the provisions of this .Si.ecialr.iti-srp. 
act shall, directly or indirectly, by any si)ecial rate, rebate, drawback, ■^.j"''"'*' '1""'" '' 
or other device, charge, demand, collect, or receive froui any persou or 
(leisons a greater or less compensation for any service rendered, or to 
lie aeudered, in the transportation of jiassengers or pro|)erty, subject to 
liji5i)rovisions of this act, than it charges, demands, collects, or receives 

* 

negative in character ; that is, it stated what the railroads might 
not do, rather than what they should do. Finally, since the 
regulations of the commission were subject to judicial review, 
railroad lawyers made special efforts to have its decisions re- 
versed in the United States Courts, in order to create in the 



TRANSPORTATION 165 

minds of the people the feehng that the commission was weak 
and inefficient. 

Amendments to the law. — The railroad lawyers did in fact 
create the impression that the commission was weak, also, to 
their own grief, that the law needed to be amended so as to 
give it more authority. Accordingly, in 1891 the commission 
was empowered to bring suit in the name of the United States 
against ofTending railroads. Later, the Elkins Amendment 
(1903) and the Mann-Elkins Amendment (1910) increased the 
number of commissioners and changed the annual salary from 
$7500 to $10,000 ; gave the conunission control over the book- 
keeping methods of the roads ; prohibited any railroad from 
transporting products, lumber excepted, in which it is interested 
as a producer ; and finally, it gave the commission power to say 
just what rates are reasonable. The Elkins-Mann Act created 
a commerce court, which was abolished a few years later, to 
pass on appeals from the commission that had" formerly been 
carried to the Supreme Court of the United States. 

Meaning of government regulation. — The regulation of 
railroads by the government has a deep significance. It came 
only after the public was thoroughly convinced that the railroad 
business was necessarily monopolistic in character, and that 
private individuals were powerless in coping with the problems 
of transportation. The various railroad laws show that the 
public, while slow to act, can be aroused when its vital interests 
are in jeopardy. What it did in the case of railroads it can do 
in any other case ; and the important thing for us to remember 
is that the interests of society are paramount, and must be 
conserved at all hazards. 

There is, however, a vital difference between government 
regulation and government ownership. The latter is far more 
revolutionary in its nature and involves greater administrative 
problems. 



166 ELEMENTARY ECONOMICS 

EXERCISES AND PROBLEMS 



1. What is the character of the rivers that empty into the Atlantic ? 

2. Mention and locate the most important harbors along the 
Atlantic coast. 

3. How do they compare with the Pacific harbors in number and 
size? 

4. What was the importance of rivers in settling the West ? 

5. What effect did the success of the Erie Canal have on canal- 
building in the West? 

6. When was the Baltimore and Oliio Railroad begun? 

7. How did the Civil War affect railroad-building? 

8. Which Pacific railroad was first opened to traf&c? 

9. Why did the national government assist in the building of 
transcontinental railroads? 

10. Why should our rivers be utihzed to a better advantage? 

11. What are the present tendencies in wagon-road building? 

12. What is meant by the expression "joint costs"? 

13. Mention the various kinds of railroad discriminaticJns. 

14. How can a railroad often charge less for a long haul than for a 
short haul? 

15. Why are railroad rates higher on shipments east than on ship- 
ments west? 

16. On what ground, if any, is it justifiable for railroads to charge 
what the traffic will bear? 

17. What are "rebates"? "pools"? 

18. How successful have the states been in regulating railroads? 

19. When was the original Interstate Commerce Act passed ? 

20. What changes have been made in this act? 

21. Is railroad capital fixed, circulating, specialized, or free? 

B 

1. A merchant of ladies' ready-to-wear garments decides to put in a 
stock of shoes. 

a. How will he determine his overhead expense in handling 

shoes ? 
h. Can he afford to sell shoes cheaper than an exclusive shoe 
merchant? Why, or why not? 



TRANSPORTATION 167 

c. Can he afford to sell shoes at a loss f Why ? 

d. Can he make money by doing so ? How ? 

2'. Suppose you invest $2000 in railroad stock. If the Interstate 
Commerce Commission reduces rates so that the value of your stock 
falls to $1500, have you a just complaint? Explain with some 
detaU. 

3. Make a list of the public service corporations in your community. 

a. Which have corporative forms of organization? 

b. Which are monopolies ? 

c. Which have their rates for service fixed by law ? 

d. Which, if any, do not earn fair dividends ? 

4. What transportation systems have been beneficial to your 
community? What has been the special benefit? Make as long a 
list as you can of the ways by which you have seen goods transported. 

5. Illustrate, from your own experience or observation, the effect 
of the following on railroad building : 

a. Rivers. 

b. Mountains. 

c. Seaports. 

d. Raw materials. 

e. Climatic conditions. 

C 

1. "Many of the routes of our most important wagon roads were 
marked out long before Europeans came to our shores." 

a. What factors determined the location of paths made by wUd 

animals ? 
6. Why would the Indians naturally frequent these paths ? 

c. What roads did the earliest settlers use? 

d. Why should they widen and improve the paths ? 

2. A political speaker once declared that railroad rates should be 
the same for all commodities. If the many rates now in effect were 
displaced by one flat rate : 

a. How would prices be affected? 

b. Make a list of goods which might not be shipped. 

c. How would railroad rates be affected? 

d. What would be the effect on railroads in different sections of 

the country? 

e. How would railroad extension be affected? 



168 ELEMENTARY ECONOMICS 

3. "Improved means of transportation have tended not only to 
equalize conditions of living in different parts of the world, but also to 
better the living conditions of the lower classes." Do you agree? 
Why, or why not? 

4. The Interstate Commerce Commission was authorized a few 
years ago by Congress to undertake a valuation of the railroads of the 
country. 

a. Why was this authorization made? 

h. What different kinds of valuation was it possible to make? 

c. Which kind would the railroads themselves prefer? 

d. What were some of the difficulties encountered by the Com- 

mission ? 

SUPPLEMENTARY READING 

Bullock, I ntroduction to the Study of Economics, 3d ed., pages 343-372. 
Ely, Outlines of Economics, 3d ed., pages 557-576: 
Fetter, Economics, Vol. II, pages 408-426. 
Seager, Principles of Economics, pages 424-441. 
Seligman, Principles of Economics, 5th ed., pages 613-640. 
Taussig, Principles of Economics, 2d ed., Vol. II, pages 368-38L 



CHAPTER XIII 
MARKETING THE PRODUCTS OF INDUSTRY 

39. Separation of Producers and Consumers 

Producing for the market. — It is a mere truism to say that 
production leads directly to the market — that is, that each 
producer expects not to consume his own products, but to sell 
them. Aside from those engaged in farming, the typical Ameri- 
can workman seldom has occasion to consume the products of 
his own hands or brain. If he works in a shoe factory his whole 
attention is absorbed in the detailed operation he is called on 
to perform. His employer could not possibly pay him in his 
own products, for he cannot live by shoes alone. Producing 
for the market thus leads to striking results. It permits the 
individual to specialize, and to create utilities which he himself 
has no desire to consume. 

So accustomed does each person become to confine his pro- 
ductive activities to his own narrow field that he seldom gives 
a serious thought to the modifications which his product must 
often undergo before it is finally ready for consumption. A 
lumberman in the Far Northwest fells trees and cuts their 
trunks into convenient lengths for rafting. So far as he is 
concerned the logs are finished product. He has no interest in 
the tortuous course through which they must go before they 
can be consumed. His is the log market, not the market for 
house lumber, ship timbers, or lead pencils. His whole atti-' 
tude of mind, however, would be changed if he produced for 
direct consumption. Then he would see logs, not as logs, but 

169 



170 ELEMENTARY ECONOMICS 

as houses, barns, sheds, and fences ; that is, there would be no 
such thing to him as a log market. Fortunately for the prog- 
ress of society, the productive processes are usually divorced 
from consumption in so far as identical goods are concerned. 

Buying for consumption. — Producing for the market im- 
plies that the market is the source of want gratification. Our 
shoe-factory worker goes into the market and there he supplies 
his wants by exchanging, not shoes, but the wages which he has 
previously received in the form of money. This too is such a 
common everyday occurrence as seldom ever to attract atten- 
tion. Yet its significance is apparent when we give it a second 
thought. Every one of us daily consumes a variety of goods 
the origins of which are remotely removed from us. A common 
lead pencil carries the stamp of far distant forests and mines, of 
complicated and costly machinery, of countless miles of rail 
and water transportation, and of infinite labor and toil, 

40. Indirect Methods of Marketing 

The primitive market place. — The first bartering, as we 
have already noticed, was characterized by the higgling of two 
individuals alone, uninfluenced by other traders. The next 
step was the primitive market place, which owed its origin to 
the accessibility of its location to various tribes ; or perhaps to 
the influence of some neighboring church or monastery which 
undertook to keep peace among the traders. Here at stated 
periods the people assembled, bringing with them the products 
which they desired to exchange for other goods. Very soon, we 
may imagine, it was discovered that certain goods, such as 
iron, spices, salt, and woolen cloth, were very generally in 
demand. Naturally, some more alert than their neighbors 
saw the advantage of devoting more time to the production of 
those goods which were generally desired. They saw also that 
they could supply their own wants for other goods easier by 



MARKETING THE PRODUCTS OF INDUSTRY 171 

resorting to the market place than by direct production. At 
the same time another group known as merchants saw the 
advantage of giving their whole time to the collection of goods 
for these markets. Gradually there gi'ew up the custom of 




Maxwell Stkeet, Chicago. 
Here business is conducted on the street, very much as it is in an ordinary 

retail store. 



using money in making exchanges, the merchants buying goods 
from producers and selling them again to consumers. From 
such crude beginnings has developed the highly complicated 
industrial life of the present time with its producing to sell 
and its buying to consume. 



172 ELEMENTARY ECONOMICS 

The place of the retailer. — ^ Clearly, the most important link 
in the chain which binds production and consumption is the 
retailer, for it is he that must anticipate the wants of the con- 
sumer, provide beforehand for supplying these wants, and have 
the goods ready in convenient form for the consumer when they 
are demanded. His position is also the least open to attack 
by those who insist that the producer and the consumer are too 
far apart. His would be the last to give way. The normal 
American family buys its groceries in small amounts — a pound 
of coffee, five pounds of sugar, a quarter of a barrel of flour, 
and so on. It has not sufficient funds to permit buying in any 
other way, if it were so inclined. Besides, it is not inclined, 
for too much trouble is involved in finding producers. Even 
that would not be the end of the matter. Some one must divide 
and subdivide the product, wrap it carefully, and deliver it to 
the door of the consumer. All these things the retailer does. 
Besides, he usually furnishes limited credit, gives his advice 
freely in making selections, and stands behind the quality of 
his goods. 

During the early months of the Great War many consumers 
were persuaded that they could effect economies by going more 
directly to the producers. Consequently, they demanded that 
wholesalers in meats, fruits, vegetables, and bread should meet 
them halfway by establishing conveniently located markets. 
This demand the wholesalers very generally met. In one West- 
ern city it soon became a practice, if not a fad, for well-to-do 
people to trade at these markets and to carry their purchases 
home.' The spirit which prompted this movement was laudable 
to say the least. It taught the typical housewife more about 
relative food values than she had ever before known. Besides 
it gave her a new view of life and a keener sympathy with her 
less fortunate neighbors. The movement, however, did not 
result in the elimination of retailing costs, though it evidently 



MARKETING THE PRODUCTS OF INDUSTRY 173 

reduced them for a time. The wholesalers found that con- 
siderable cost in the way of rent, clerk hire, depreciation, 
and dishonesty, was involved. Also the consumer found 
that the economies effected did not in many cases compen- 
sate for the loss of real service on the part of the established 
retailer. 

Place of the middleman. — The economic justification of the, 
middleman — jobber, commission merchant, broker — is less 
evident, though even he renders a service which the business 
world would find it inconvenient, if not impossible, to abolish. 
His chief function, as marketing is now organized, is to serve, 
as it were, as the agent of retailers ; to collect for them and have 
ready on call supplies of goods from which they can replenish 
their stocks ; to assist them in anticipating demand ; and 
finally, to extend credit to the retailers, to give them the benefit 
of his experience and judgment, and to secure them against loss 
resulting from inferior goods. 

The middleman, unlike the retailer, who comes in contact 
with the consumer, renders his greatest marketing service to the 
producer. A wholesale grocer, for example, deals more or less 
directly with meat-packers, canners, millers, and importers. 
He furnishes them a market which he has already made, or 
undertakes to make, among retailers, thereby relieving them 
of heavy selling expense. Moreover, his advance purchases, 
by rendering it easier to make production conform to consump- 
tion, tend to stabilize industry. The commission merchant, 
particularly if he deals in agricultural products, occupies an 
important place in marketing, which farmers, despite their 
contention to the contrary, would find it difficult to fill by deal- 
ing directly with packers or retailers. 

Basis of indirect marketing. — It must be clear by this time 
that there is some good reason why producers and consumers do 
not ordinarily deal directly with each other. It must also be 



174 ELEMENTARY ECONOMICS 

equally clear that no middleman or group of middlemen can 
forge, uninvited, additional links in the marketing chain. Conse- 
quently, there must be some economic reason for their existence 
as such. We can best find this reason by reference to some 
simple, everyday practices familiar to us all. The typical 
American farmer knows that in the neighboring town there is a 
market for his weekly supply of eggs. The people of the town 
know also that every farmer in the surrounding country has a 
surplus of eggs. With these facts established,- it is obvious that 
our farmer could, if he desired, dispose of every one of his eggs 
in the town by peddling them from house to house ; also that 
any housewife in the town could, if she desired, secure her 
weekly supply of eggs by calling at some farmer's home. The 
farmer ordinarily does not care to undertake the sale of his 
surplus eggs among the consumers in the town. The town 
housewife, on her part, has, let us say, no ready means for going 
into the country. In either case time and expense are involved 
in effecting a sale. Neither is willing to take the initiative. 
Both resort to the local grocer, who can, and usually does, 
handle the €ggs cheaper and with greater satisfaction to both 
consumer and producer than either the farmer or the housewife 
could have handled them. The retailer can also render cheap 
and efficient service in the matter of delivery, if he is not too 
much incumbered by those who abuse it. The only proof for 
this statement is that independent delivery systems operating 
in many moderately sized cities usually charge no more than five 
cents for delivering an order of any amount. Delivery of a loaf 
of bread or of a spool of thread under these circumstances 
imposes a burden on the consumer ; and it should, for they are 
the very consumers that have rendered delivery systems costly. 
As it is with retailers so it is with middlemen. They have 
arisen to fill gaps between producers and consumers which 
neither could or would fill. 



V 

MARKETING THE PRODUCTS OF INDUSTRY 175 

"Wastes in indirect marketing. — The mere fact that certain 
groups of retailers and middlemen meet demands made by 
producers and consumers is not evidence in itself that there 
are no sources of waste in our present system of marketing. 
One, the delivery system, has already been mentioned. An- 
other is poorly written and poorly prepared advertising copy. 
A third is in the failure to make distinctions between con- 
sumers. A city department store, let \is say, maintains a free 
rest-room, a free nursery, and provides telephone service with- 
out cost, the entire expense being paid in the long run by its 
customers. Those who come in often to rest, or to leave their 
babies while they shop, and those who use the free telephone 
service regularly, can well afford to pay higher prices for goods 
than would be the case under more modest surroundings. But 
how about those customers who are never tired, have no chil- 
dren, or are dumb ? Wliy should they be compelled to pay for 
something they cannot use? The usual answer is that this 
store, because of its large volume of sales, sells as cheaply as its 
smaller competitors. There is truth in the answer, which, 
however, does not explain why customers should be charged for 
services they cannot enjoy. 

Another waste in the present system of marketing, but which 
in itself is not inherent therein, comes from selling goods on 
credit. Any merchant, whether he be retailer or jobber, knows 
from experience or observation that a credit business always 
involves bad accounts, and that its maintenance in the mere 
matter of bookkeeping incurs considerable expense. Clearly, 
cash customers must, if the seller is not to lose, bear the burden 
of bad accounts. Here as in many other cases of waste the 
consumer is largely responsible. If every cash customer should 
confine his purchases to cash stores, the practice of granting 
credit would cease in a short time. What has been said in this 
respect is merely illustrative. Any one of us can, by observing. 



176 ELEMENTARY ECONOMICS 

discover a surprisingly large number of other sources of waste 
in marketing. 

41. More Direct Methods of Marketing 

Nature of the problem. — The need for eliminating every un- 
necessary expense involved in getting goods into the hands of 
the consumer is real ; and no proposal that offers to meet this 
need should be neglected, even though its adoption might work 
hardships on particular groups of individuals. Society is 
entitled to every saving possible in this respect. No individual 
or group of individuals can rightfully impose its smaller interest 
as an ol)stacle to the progress of social welfare. Consequently, 
the contention that some change in marketing methods is un- 
desirable simply on the ground that it destroys the business 
of some class of merchants, is baseless. In fact, it is worse 
than baseless ; it is harmful, for it assumes that society should 
continue to reward the economic activities of a man after his 
services to society have ceased. Apart from such contentions 
and the arguments that go with them, we can conclude that 
any change in marketing methods carried on under conditions 
of competition is likely to be beneficial, since it could occur 
only as the result of a natural demand. 

The department store. — The department store claims to 
effect economies in marketing : (1) by ehminating jobbers, 
brokers, and even importers, and (2) by saving, through com- 
bination and organization, much of the expenses of retailing 
incurred by small stores. Whether or not it succeeds in either 
of these two respects is a disputed question, since its gains 
from buying direct and in large quantities and from its 
economies in organization are offset, at least to some degree, 
by its heavy advertising and overhead expenses. It is probable 
that the advantage which these stores offer to the consumer is 
one of selection rather than one of price. Obviously, in a great 



MARKETING THE PRODUCTS OF INDUSTRY 177 

many lines a modern department store has a wider variety than 
any of its smaller competitors. There is not, however, such a 
wide difference as many people suspect, especially between the 




Courtesy of John Wanamaker, Philadelphia 

t Interior View of a Large Department Store. 



department stores, on the one hand, and well-managed specialty 
stores, on the other. 

The mail-order house. — The mail-order house goes even 
beyond the department store in an effort to bring producer and 
consumer closer together. Working from the production side, 
the typical mail-order house is a manufacturer as well as a 
large-scale buyer of goods directly from producers. It may 
own sawmills, lumber yards, furniture factories, shoe factories, 
stove factories, and various other mills and factories. Or, as 
is often the case, it may contract for the entire output of factories 
and mills owned and operated by other concerns. Whatever 



178 ELEMENTARY ECONOMICS 

the method employed, its purpose in any case is to secure goods 
at the lowest possible price. Much more significant are the 
methods employed by mail-order houses to get their goods into 
the hands of consumers. Invariably, the medium of salesman- 
ship is a printed catalog, characterized by its excellence of 
advertising copy and illustrations. Customers order direct 
from the catalog, each advertised article bearing a stock 
number and price. 

No other business institution in the country is so universally 
disliked by retailers, who argue that a mail-order house, quality 
as well as price considered, does not give better values than 
local dealers. They also take the position that it is the duty 
of consumers to keep their money at home by patronizing them. 
The validity of the first argument rests on a question of facts ; 
of the second, on economic principle. Whether or not a certain 
mail-order house offers better values than a certain group of 
retailers is a question that can only be answered, if at all, after 
an exhaustive examination by experts. The appeal to local 
pride has usually had little weight, since consumers are likely to 
feel justified in getting the best bargains possible. Retailers 
everywhere are beginning to see the futility of the " home- 
market " argument, with the result that more and more they are 
taking the initiative in persuading people to compare values, 
and in some cases the retailers are profiting by studying the 
advertising copy in the "big catalogs." Moreover, the^^ are 
awakening to the possibilities,which come from a more liberal 
policy of advertising in their local newspapers. 

The chain store and the variety store. — The typical chain 
store resembles the department store in that it attempts to 
eliminate the middleman. Unlike the department store, how- 
ever, it deals in one general line, and has many different sites. 
The greatest advances in this respect have been in such lines as 
restaurants and drug stores. The large variety-store system 



MARKETING THE PRODUCTS OF INDUSTRY 179 

also buys direct from manufacturers and retails through its 
stores directly to the consumer. Its success has rested on the 
fact that regular stores have never given sufficient attention 
to what they are likely to consider " trifling trade." This 
trade for any one store, such as a hardware store or a plumbing 
shop, is in fact of slight importance. Yet when gathered to- 
gether it mounts into millions of dollars annually. 

Direct sale to the consumer. — It will be noticed that in the 
preceding discussions the attempts to lessen the distance between 
the producer and the consumer have been made by neither pro- 
ducers nor consumers as such, but by third parties. We may 
now turn our attention to another aspect in which the producer 
tries to bring his product directly to the consumer. The most 
easily observed example of this is the sale of gasoline by the 
Standard Oil Company. Everywhere one sees the stations of 
this concern serving the automobile public, though it must be 
kept in mind that the same product may be obtained from local 
dealers. Other producers, too, sell only direct to consumers, 
depending on personal letters, catalogs, and national advertising 
to create a demand for their goods. 

EXERCISES AND PROBLEMS 



1. What is the significance of producing for the market? 

2. When is a product finished ? 

3. How did markets arise? 

4. What determined their location ? 

5. What kinds of goods were first produced for the market? 

6. Just how important is the place of the retailer in marketing? 

7. What did the Great War teach about marketing? 

8. What is the difference between a retailer and a middleman? 

9. Why are there so many different kinds of middlemen in market- 
ing? 

10. Of what value is the wholesaler or commission merchant? 



180 ELEMENTARY ECONOMICS 

11. What are some of the wastes in indirect marketing? 

12. How far would direct marketing eliminate these wastes? 

13. Why do department stores maintain free rest-rooms? 

14. Who pays the expense of maintaining them ? 

15. How does credit lead to waste, particularly in retailing? 

16. What groups of individuals might object to more direct methods 
of marketing? 

17. How valid are the claims of department stores that they sell 
goods cheaper than their competitors in special lines ? 

18. What effect has variety of stock on volume of trade? 

19. What is the chief objection urged against the mail-order 
house ? 

20. How valid is this objection? 

21. What is a "chain store"? 

22. Why can a variety store usually offer goods at. excessively low 
prices ? 

23. What lines of goods are best adapted to sell directly to consumers ? 



' 1. Trace a quantity of iron ore through its different processes of 
production, pointing out the different markets in which it is offered 
for sale. Do the same with corn, wheat, and cotton. 

2. Mention any articles of your own production which you have 
consumed. 

3. Imagine yourself in an early English market place. 
u. Where was it located? 

b. What kinds of goods were offered for exchange ? 

c. What difficulties were encountered in making exchanges? 

d. Was bargaining characterized by "higgling"? Explain. 
c. How important was the part played by money ? 

4. Suppose you decide to follow the "cash and carry" plan of 
buying groceries and meats. 

a. How much time would you consume each day in going to the 

markets ? 

b. Would these trips involve wear and tear on shoes and clothing? 

c. Can goods be carried more cheaply than they can be hauled? 

d. Is your time worth more or less than that of a delivery boy? 

e. Would you be more likely to buy with greater care than if you 

telephoned your orders? 



MARKETING THE PRODUCTS OF INDUSTRY 181 

/. Weigh the advantages and disadvantages of marketing in 
person. 
i. Which has the greater weight ? 
ii. Is the weight as great as is sometimes thought? 

5. Give some instances from your own experience or observation, 
of attempts to bring producers and consumers closer together. 

a. How well did these attempts succeed? 

h. Did any one oppose them? Who? Why? 

6. A merchant requests you to draw up plans for the establishment 
of a chain of stores. 

a. What kind of business would you suggest? Why? 
h. In what cities would you establish stores? 

c. What sort of sites would you desire to utilize? 

d. How would the choice of cities and sites be influenced by the 

character of the business? 

C 

1. "The greatest need in the modern industrial world is to bring 
the producer and the consumer together." 

a. Is this a universal opinion? Why, or why not? 
h. Who would be likely to hold an opposite opinion? 

c. What steps would be necessary in making such a change? 

d. Who would profit most? 

e. Who would suffer? 

2. During the past decade two or three men have made millions of 
doUars in operating chains of restaurants. 

a. What particular advantage has the chain store in the res- 
taurant business? 
&. Which types of restaurants still predominate in the cities ? 

c. What is the present tendency? 

d. How does a rise in the prices of foodstuffs affect the different 

types of restaurants? 

3. The chief argument advanced by retailers against mail-order 
houses is that the people would profit by spending their money at 
home. 

a. Do mail-order houses undersell local merchants ? Discuss. 
h. Just how far is this argument valid? 

c. To what extent is advertising a factor in the success of the 
mail-order house? 



182 ELEMENTARY ECONOMICS 

d. Can local merchants use to advantage the methods employed 

by mail-order houses? How? 

e. How may local newspapers be used to advantage by local 

merchants in their competition with mail-order houses? 
4. Discuss with a live local merchant the economies claimed by 
mail-order houses. Ask him to compare prices and quality. Which 
offers the best value? 

SUPPLEMENTARY READING 
Ely, Outlines of Economics, 3d ed., page 154. 



CHAPTER XIV 
GOVERNMENT AND PRODUCTION 

42. Patents, Copyrights, and Trade-marks 

Hope of reward a factor in improvement, — The hope of 
financial reward stimulates enterprisers, as we have seen, to 
exert themselves industrially. The same hope stimulates 
inventions and literary productions, though the opinion pre- 
vails among many people that inventors and authors work 
merely for the love of the work itself. Occasionally some 
individual gives his whole life unselfishly to the production of a 
machine, or to the discovery of a chemical process, or to the 
writing of a book. The overwhelming majority of men, how- 
ever, whether they be enterprisers, laborers, scientists, or 
authors, are encouraged, if not inspired, to toil long hours 
and to undergo mental and physical discomfort by the hope that 
their labors will bring them financial reward. And it is for- 
tunate for the progress of the industrial arts that men are 
willing to think and to work, even though they are prompted 
wholly or in part by selfish motives. Realizing that a hope of 
financial reward serves to encourage inventive genius, the United 
States in common with all other civilized nations permits 
inventors and authors to enjoy a monopoly of their products. 
Practices vary from country to country, though the principle 
involved is the same in all cases. 

Patent law of the United States. — The law under which 
patents are now issued in this country states that " any person, 
native or foreign, who has invented or discovered any new and 

183 



184 



ELEMENTARY ECONOMICS 



useful art, machine, manufacture or composition of matter, or 
any new and useful improvement thereof, not known or used in 

Number of Patents Issued by Years : 1895-1917. 





into t^ooo)o — coco'*in(CNooo)0'-<Moo^w<ON 

0)0) OO'O'OOOOOOOOOO^'---'-'-'-'-;- 

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Panic of 1907 




























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Period of Business Expansion 
1898-1907 






















































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45,000 



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35,000 



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this country, and not patented or described in any publication in 
this or any foreign country, before his invention or discovery 



GOVERNMENT AND PRODUCTION 185 

thereof, and not in public use or on sale for more than two years 
prior to his application, unless the same is proved to have been 
abandoned, may upon payment of the fees required by law and 
other due proceedings had, obtain a patent therefor." The law 
further states that the inventor may have for a period of seven- 
teen years the exclusive right to manufacture and sell his 
invention. Infringement of a patent gives the inventor just 
cause for appealing to the courts for protection and redress. 

Copyright law. — In principle a copyright resembles a patent. 
Each is the basis of a temporary monopoly. The most common 
copyrighted productions are books. Songs, pictures, magazines, 
and even news items may also be copyrighted. As in the case 
of patents, infringement is punishable by law. A copyright 
runs for twenty-eight years, though the author or his direct 
heirs may get an extension of fourteen years. No large per 
cent of copyrights is ever extended, however, for the sale of a 
book is likely to cease within a few years after it is first issued. 
Books written in foreign countries may now be copyrighted in 
the United States, though for years this privilege was refused ; 
and this refusal accounts in large measure for the hostility of 
Charles Dickens and other English writers toward America. 

Trade-marks. — In registering a trade-mark the government 
grants to the owner its exclusive use in marking certain commod- 
ities. Whether or not it will ever possess any value depends 
entirely on the owner's ability to create for it good will in the 
minds of the buying public. If he succeeds, it becomes the 
basis of a profitable business. The monopohstic character of 
the trade-mark accounts in large measure for one of the most 
important tendencies in present-day marketing — the increase 
in the number of nationally advertised products. Without its 
protection producers could not afford to create a demand for 
particular brands, for they would have no assurance that un- 
scrupulous competitors would not flood the markets with a 



186 ELEMENTARY ECONOMICS 

substitute bearing the same label, nor would consumers be 
able to choose the product of the original producer. Hence 
the trade-mark establishes a bond between the producer and 
the consumer, which the producer cannot afford to break by- 
lowering the standard of his product. Consequently, we may- 
say, trade-marks protect consumers to a large degree from 
imposition. 

Objections urged against the present patent law. — In spite 
of the obvious benefits that arise from granting monopolies to 
inventors, there are those who argue that better results could be 
obtained by withdrawing government protection from all such 
enterprises. This argument is based on the assumption (1) that 
genius does not need a financial stimulus ; (2) that the reward 
arising from this form of monopoly usually goes into the 
pockets of unscrupulous manufacturers who make a practice of 
overreaching inventors ; (3) that patents serve as the basis of 
objectionable industrial monopolies ; and (4) that patents are of- 
ten bought by owners of similar, but inferior, patents merely in 
order to suppress them. 

43. Regulation of Industrial Monopolies 

The early trusts. — The years following the close of the 
Civil War saw in many lines a bitter struggle for business, which 
produced cutthroat competition and consequently a loss of 
profits. The natural result was combination. In 1879 the first 
trust, the Standard Oil Company, was organized under the 
guidance of John D. Rockefeller. The plan of organization 
provided that the owners of numerous small oil refineries located 
in Ohio, Pennsylvania, and New York should place their stocks 
in the hands of nine trustees in exchange for trust certificates. 
These trustees carried on all the business of the various in- 
terested refineries as if it were the business of one large con- 
cern. So successful was this plan that other groups of in- 



GOVERNMENT AND PRODUCTION 187 

dustries took it up, notably the manufactures of whiskey and of 
sugar. Between 1890 and 1892 several of the state courts 
declared such combinations to be illegal and ordered them to 
dissolve. This was the end of the trusts proper, though the 
term has continued down to the present time to designate con- 
cerns supposed to possess monopolistic advantages. 

The trust movement. — The dissolved sugar trust imme- 
diately reorganized into one gigantic corporation under a New 
Jersey charter. The oil trust followed a different plan. Mr. 
Rockefeller and his associates, having secured control of the 
more important refineries that had composed the old monopoly, 
carried on the oil business down to 1899 very much as a single 
organization would have conducted it. In that year the re- 
fineries were merged into a single large corporation, the Standard 
Oil Company of New Jersey. Both reorganized concerns (the 
old oil and sugar trusts) succeeded so well as to cause other 
enterprisers to investigate the advantages of combining their 
respective lines. By 1898, it has been estimated by a good 
authority, eighty so-called trusts, with an aggregate capital- 
ization of $1,000,000,000, had been formed. During the next 
six years the movement went rapidly forward. At the begin- 
ning of the year 1904 the number of trusts exceeded 300, and 
their combined capital stock exceeded $5,000,000,000. By far 
the largest was the United States Steel Corporation, which 
boasted a capitalization in excess of $1,400,000,000. In time, 
as we might suspect, practically every productive industry in 
the country was combined. The effect on investments was 
important. Capitalists and bankers, even the most con- 
servative among them, came to feel that the risks involved in 
trust investments were negligible. Small investors caught the 
feeling. The result was a rush to buy stocks and bonds. The 
failure of the ship-building trust, however, awakened the in- 
vesting public to the realization that the risk attached to the 



188 ELEMENTARY ECONOMICS 

purchase of stocks and bonds of industrial trusts was greater 
than they had anticipated. 

Popular feeling aroused against the trusts. — The rise and 
development of the trust movement was caused and accom- 
panied by a general rise in the prices of goods, which began about 
1896. The public soon saw the rise in prices, and very naturally 
they attributed it to the trust movement. They were en- 
couraged in this belief by independent concerns which had felt 
the weight of the combinations, also by various groups of per- 
sons who sincerely believed that the movement was a menace 
to the best interests of American society. More influential 
than either of these was the designing politician who saw in the 
growing hostility of the people toward the trusts an opportunity 
to further his own interests. Accordingly, he and his kind went 
up and down the country preaching a crusade against what they 
delighted to call the " unholy alliance " of capital. It cannot 
be denied, however, that the trust development threatened the 
best interests of society, nor that the people needed to be aroused 
to their danger. And it is pleasant to record that the people 
when aroused went about the task, somewhat blunderingly 
perhaps, but in a spirit of justice, to purge the trusts of their 
evil features. 

Evil practices of the trusts. — The most outstanding ob- 
jection which the people had to trusts was based on their treat- 
ment of independent competitors. For years it was the common 
practice of the Standard Oil Company, as we have already seen, 
to secure lower freight rates than its competitors, thus placing 
them at a decided disadvantage in the matter of competing 
with the trust in the sale of oil products. Other combinations, 
notably the sugar trust, likewise secured discriminatory rates 
from the railroads. Second, the trusts in an effort to crush 
competition had a practice of lowering prices in competitive 
markets, and of recouping themselves by higher prices in the 



GOVERNMENT AND PRODUCTION 189 

markets where they had no competition. Both these practices 
the people condemned on the ground of fair play. They de- 
manded that the trusts, while they might be entitled to the 
economies that arose from conducting business on a large 
scale, should not use unfair methods to crush their small rivals. 

Trust regulation. — The first attempt by the national govern- 
ment to curb the monopolistic powers of the trusts came even 
before the trust movement proper had got under way. The 
practices of the old Standard Oil Company operated by its nine 
trustees had created suspicion in the minds of the people. Soon 
this suspicion was changed to distrust. Then a demand arose 
for some sort of regulative legislation. The result was the 
Sherman Anti-Trust Law of 1890. This law declared illegal 
" every contract, combination in the form of trust or otherwise, 
or conspiracy, in restraint of trade or commerce among the 
several states, or with foreign nations." It also declared it to be 
unlawful for any person to " monopolize, or attempt to monop- 
olize, or combine or conspire with any other person or persons, 
to monopolize any part of the trade or commerce among the 
several states, or with foreign nations." The essential feature 
of the law was its prohibition of the restraint of trade. 

This law, as we have seen, was designed primarily to curb 
the illegal activities of the trusts. Yet during the first twenty 
years of its existence it failed signally to fill the want for which 
it had been designed. Suits were brought under the act; 
yet few juries were found that could distinguish between 
reasonable and unreasonable restraint of trade. Strangely 
enough, one of the suits successfully prosecuted was directed 
against a Connecticut labor union for restraining the trade of a 
firm of hatters. Finally in 1910 the government succeeded in 
having both the Standard Oil Company and the American 
Tobacco Company dissolved. The success of the government 
in these cases encouraged the Department of Justice to in- 



190 ELEMENTARY ECONOMICS 

stitute other suits. Four years later a new act added strength 
to the original anti-trust law by making some of its provisions 
more definite. 

The Clayton Anti-Trust Law, enacted in 1914, exempted labor 
unions and farmers' cooperative associations from anti-trust 
prosecution. It declared illegal certain practices of one cor- 
poration owning stock in another corporation, and expressly 
forbade " unjustifiable discriminations in the prices charged to 
different persons." During the same year a federal trade 
commission was established with power to prevent discrimina- 
tions in commerce, to make reports, and to investigate, at the 
request of the attorney general, alleged violations of the anti- 
trust laws. 

Significance of government regulation. — The interference of 
the government in industry is a radical departure from the 
older notion that business should be free from all state regulation 
or oversight. Radical as it is, the change from laissez faire 
back toward mercantilism came in response to the demand of 
society that it be protected from its most powerful industrial 
members. Just what effect the various anti-trust laws and the 
court decisions based on them have had on production, it is 
impossible to say. And because of thig very uncertainty, 
caution and care must be exercised by the government in 
diverting enterprise from one channel to another. Moreover, 
government regulation and government interference, let us 
remember, are likely to be the first steps toward government 
ownership. 

44. Regulation of Public Utilities 

Early experiences. — Our notice of the monopolistic char- 
acter of public utilities in discussing the nature of monopolies 
paves the way to an examination of the methods designed by 
the state to regulate them. Early in the history of the water, 



GOVERNMENT AND PRODUCTION 191 

gas, and electric lighting industries the government exerted 
little control in the regulation of their rates and services. Much 
like the railroads, these industries undertook to conduct their 
business with little regard to the welfare of the people whom they 
served, and here again, as in the case of the railroads, the people 
found it necessary to impose regulations in order to protect their 
own interests, and, strange as it may sound, the interests of 
these industries. In many sections of the country the public 
was not easily aroused. To many the difference between a five- 
cent and a four-cent street-car fare was insignificant. Yet in 
the aggregate it mounts high. Likewise, an eleven-cent electric 
rate appeared to be little more than a ten-cent rate. The 
corporations themselves sensed the danger, but instead of 
correcting existing evils many of them tried to fortify their 
position by packing city councils with employees or friends of 
the management. As a result, the record of more than one 
American city is besmirched with every form of petty manip- 
ulation, with lobbying, and even with bribery. Fortunately, 
the good judgment of the people led them to see that they were 
the masters of the situation. The result was, and is, that con- 
ditions surrounding the services of public utilities corporations 
are much better than the most optimistic would have predicted 
a few years ago. 

Form of regulation. — In the matter of regulation each city 
may take one of two courses. It may by an ordinance, as is 
usually the case, set the maximum which a given system may 
charge for public service ; or it may own and operate the system, 
thus securing for the city treasury any excess which under the 
other plan would go into the pockets of individuals. Ownership, 
on the whole, has been confined to water service, though many 
of the smaller cities and towns operate their own lighting 
systems, and some even operate their own gas plants. In a 
few of the larger cities, the public has an interest in the local 



192 ELEMENTARY ECONOMICS 

street-railway system. In Chicago, for example, the city shares 
in the profits of carrying passengers on the surface lines. 

Even those who have objected the most strenuously to 
the regulation of industrial corporations have expressed sym- 
pathy with the regulation of municipal service plants. This 
regulation, however, is beyond the discussion stage ; neverthe- 
less, as intelligent members of society we must give attention 
to the best methods of regulation. 

45. Fixing Prices 

Nature of the problem. — This movement, toward what many 
call socialism, manifests itself almost exclusively in the reg- 
ulation of railroads, public utilities, and trusts. We have had 
little experience in fixing prices except when placed under the 
stress of war. Obviously, no one, not even the government, can 
anticipate with any degree of accuracy the demand for a given 
article. And just as obviously, no one can estimate the probable 
future supply of such a product as corn or wheat or cotton. 
Since neither the demand nor the supply can be determined in 
advance, the fixing of a proper price is a difficult task. Not 
long ago a government official went to the heart of the matter 
when he said that the wisdom of fixing a wheat price at a certain 
point could be determined only after the new harvest had begun 
to come on the market. If the price had been too high, a surplus 
of the old crop would remain unsold ; if too low, the old crop would 
have fallen short in supplying the demand. Allowing for other 
influences, there is much truth in the statement. 

Experiments. — Under the stress of the Great War the 
United States government undertook to set prices on numerous 
articles of everyday consumption. The price of wheat was set 
at a figure double the average price for a term of years preceding 
the outbreak of the war. Immediately the price of corn began 
to rise, partly on account of the high price of wheat. Then 



GOVERNMENT AND PRODUCTION 193 

wheat-growers demanded a higher price for their product on 
the ground that they could make more money raising corn. 
Here we have the inevitable result of trying to fix an arbitrary 
price ; and undoubtedly the difficulty explains why modern 
society hesitates, except under the most extraordinary cir- 
cumstances, to say what a producer shall receive for his product. 

EXERCISES AND PROBLEMS 



1. What are the chief features of the United States patent laws? 

2. Point out the good and the bad phases of the patent system. 

3. What is the value of a trade-mark to the producer? to the 
consumer? 

4. How does a copyright differ from a patent ? 

5. What is a trust? 

6. Are all trusts monopolies? 

7. Are all monopolies trusts? 

8. Why did the trust movement develop so rapidly about 1900? 

9. What caused popular opinion to be aroused against the trusts? 

10. What were some of the objectionable practices of the trusts? 

11. What was the Sherman Anti-Trust Act? 

12. How did this law affect the trusts? 

13. How has this law been strengthened? 

14. What is the difference between reasonable restraint of trade and 
unreasonable restraint of trade? 

15. Why were early public utility corporations given so many 
privileges ? 

16. Just how at the present time are these corporations usually 
regulated ? 

17. What experience has this country had in price-fixing? 

18. Why is price-fixing likely at all times to be unsatisfactory? 

B 

1. What steps would you take in securing a patent? 

2. Make a short list of important inventions that have revolutionized 
American life and industry. Were these inventions patented ? Which 



194 ELEMENTARY ECONOMICS 

of the patentees has been rewarded adequately for the labor and skill 
employed in perfecting his invention? 

3. Mention twenty trade-marks with which you are familiar. 

a. Would you consider them as assets of the concerns which own 

them? Why? 
h. What similarities have you noticed in the trade-marks carried 

by the same kinds of goods? 
c. Why do business firms often retain the names of members who 

have died or withdrawn? 

4. Just how widespread is the practice of securing copyrights? 

a. How can you determine whether or not a publication is copy- 
righted? 
h. Is this book copyrighted? What is the evidence? 

c. Make a list of ten books or other publications not copyrighted, 

d. Are copyrights owned by publishers or authors? 

5. Name ten concerns which you would class as trusts. 
a. How many of the ten are manufactures? 

h. Which of these appear to be monopolies? 

c. Which, if any, have resorted to unfair competition? Explain. 

d. What is the general attitude of the people toward them? 

6. Make a list of the public utility enterprises in your community. 
a. Which of these are publicly owned? 

h. Which are monopolies ? 

c. Why does society permit monopolies in these enterprises ? 

d. To what extent are these enterprises regulated by law? 

e. Is this regulation as effective as the regulation that would arise 

from competition? Explain. 

C 

1. "Some people deny that men who have a genius for invention 
and discovery require any special inducement to follow their natural 
bent." 

a. Just how does a genius differ from other persons? 

h. Do all inventors have a genius for invention? 

c. Might genius be stimulated by a hope of reward ? 

2. Why are goods sometimes advertised, ' ' Not made by a trust ' ' ? 

3. During the early years of the trust movement the argument was 
frequently heard that the trust excelled all other forms of business 
organization in efficiency and economy. 



GOVERNMENT AND PRODUCTION 195 

a. What is the basis of that argument? 

b. In what respects are trusts more efficient : 

i. In organization? 
ii. In buying? in selling? 
iii. In transportation? 

c. What is the relation between this increased efficiency and 

prices? 
4. Because of increased costs of labor and material a street-railway 
president finds that a five-cent rate does not bring a fair return. How 
would he proceed to secure a six-cent rate? 

SUPPLEMENTARY READING 

Ely, Outlines of Economics, 3d ed., pages 195, 230-247. 
Fetter, Economics, Vol. II, pages 427-457. 
Johnson, Introduction to Economics, pages 137-150. 
Seager, Principles of Economics, pages 442-471. 
Seligman, Principles of Economics, 5th ed., pages 340-350. 
Taussig, Principles of Economics, 2d ed., Vol. II, pages 419-442. 



PART IV 
THE EXCHANGE OF ECONOMIC GOODS 



CHAPTER XV 

USE OF MONEY IN MAKING EXCHANGES 

46. Characteristics of a Good Money 

The process of selection. — The universal use of certain 
commodities for money rests on social experience, and not, as 
many believe, on some fine-spun theory evolved by statesmen 
and the law courts, that in malnng exchanges one commodity 
ought to be preferred over another. Among the early Jewish 
patriarchs, cattle and sheep were regarded not only as wealth, 
but also as measures of wealth. Homer, the Greek poet, speaks 
of the wealth of the Greeks in terms of cattle. Our own Amer- 
ican Indians employed shells in making exchanges among 
themselves; some African tribes use cubes of salt as money;' 
while in the | interior of Russia tanned hides at one time cir- 
culated as a medium of exchange. Slowly, but obviously not 
in the same period of time, each independent society, employing 
the selective process in making its choice, has experimented 
with various commodities as money. 

Value characteristics of good money. — Clearly the chief 
characteristic which any commodity /must enjoy, if it is to 
become a medium of exchange, is use value; that is, society as a 
whole must value it highly enough to desire to possess it for its 
own worth and not because some individual or some government 
has said that it possesses value. Since it has value it will have 
acceptabihty — that is, it will be desired by the individual 
members of society. If the members of any social group prefer 

199 



200 ELEMENTARY ECONOMICS 

cattle, for example, to all other forms of wealth, then cattle, 
other things being equal, naturally become the medium of ex- '- 
change. 

Notice that the last statement in the preceding paragraph 
bears the qualification, " other things being equal." Cattle 
might have a wider acceptability than furs, and yet, on account^ 
of their small value compared to thei large bulk, be less desir- 
able as a money. Diamonds, on the other hand, might also 
be thQ most highly and the most widely desired commodity in 
existence without becoming a medium of exchange, simply 
because a diamond possesses too much value compared to its 
size. Also the value of the commodity which is to serve as 
money must be reasonably stable — that is, its value must noj/ 
vary too widely or too quickly. We may conclude, therefore, 
that the value characteristics of a good money are three in 
number : (1) value, (2) reasonably large value in small bulk, 
and (3) stability of value. 

Physical characteristics of a good money. — Scarcely less 
important are the "physical characteristics which a good money 
should possess. Five such characteristics may 1 li^roperly'^be 
examined at this point: (1) durability, (2) portability, (3) 
homogeneity, (4) divisibility, and (5) cognizability. 

Any commodity that is to serve well as money should possess 
durability to a high degree. Otherwise it would wear quickly 
in its passage from hand to hand, and even deteriorate while in 
the possession of its owner.] Consequently, perishable goods, 
such as cattle, furs, tobacco, and even wheat and corn, have 
never proved satisfactory as mediums of exchange. Clearly, 
durability is a great aid to stability of value, since the new 
supply of a durable commodity for a reasonably short period of 
time is likely to be\\small compared to the entire stock of that 
commodity already in the possession of society. If wheat, for 
example, were used as a medium of exchange, it is obvious that 



o: 



USE OF MONEY IN MAKING EXCHANGES 201 

its value would fall greatly with the harvesting of each new crop 
and rise as each crop was gradually consumed. 

The second physical characteristic of a good money is port- 
ability. The commodity that serves as money must be moved 
from point to point, among the members of the society that 
uses it. Otherwise it is not money. This movement involves 
labor and expense. Hence, the commodity that combines 
greatest value in the smallest bulk, if we consider 'portability 
alone, is the most desirable as a medium of exchange. 

A good money must also be homogeneous — that is, the 
commodity from which it is made must be of the same quality 
wherever it is found. Obviously, cattle possess this char- 
acteristic to a very low degree, for scarcely any two of them are 
alike. Divisibility, which is closely related to homogeneity, 
simply means the capability of a commodity to be divided 
without destroying its value. Here again, cattle do not possess 
this characteristic. Neither do furs or diamonds. Either 
loses value by being divided. The total value of the parts of a 
split diamond never equals the value of the original stone. 

Any commodity that is to pass current as money must be 
capable of being easily recognized. Otherwise it could be 
counterfeited, which fact in itself would tend to dest-roy its 
value as a money by destroying its acceptability. 

Characteristics of gold. — Of all the commodities known to 
mankind gold possesses in the highest degree the characteristics 
of good money. Since the earliest time it has been desired for 
its own use as a commodity. Primitive man prized gold above 
all other metals. From it he made rings, chains, and other 
ornaments that appealed to his vanity. His descendants regard 
gold in much the same way. Gold is also scarce enough to make 
it highly valuable compared to its bulk, and yet it exists in 
large enough quantities to permit of its use in making exchanges. 
Finally, the value of gold is stable, though we must not get the 



202 ELEMENTARY ECONOMICS 

mistaken idea, which some have, that it does not vary. The 
reason for its stabiUty is that the supply of the metal 
coming from the mines, in any year let us say, is extremely 
small compared with the total supply in the possession of 
society. 

Gold possesses also to a high degree the physical character- 
istics of a good money. It is made durable by combining with 
the fine metal a small part of alloy. Gold wears well in coins, 
though it is best preserved by molding it in the form of bars. 
Also since it combines a relatively high value with small bulk, 
gold may be easily carried about. The homogeneity of gold is 
well known to every student of chemistry, who learns early in 
his course that it is a chemical element. All fine gold, therefore, 
is exactly alike, whether it be mined in South Africa or in 
Alaska. Gold is also divisible. No change in its shape or 
form affects its value. Two one-ounce pieces of gold are worth 
exactly as much as one two-ounce piece. Melting, rolling, or 
pounding has no effect whatever on the value of fine gold. 
Fifth, gold is the most difficult of all the metals to counterfeit. 
Any one accustomed to handle gold money can detect a spurious 
gold coin at a glance. 

From the foregoing discussion of the qualities of a good money 
we can easily see why society has, by a long process of selection, 
chosen gold as a standard. It could not have done otherwise. 
Whether or not gold will continue down to the end of time as 
the money standard, no one can say. We are reasonably sure, 
however, that a change to some other commodity will come 
only when that commodity shows its superiority to gold. 

47. Uses of Money 

As a medium of exchange. — The general desire for a com- 
modity, such as gold, stimulates its acceptability in unlimited 
amounts, since each individual knows that his neighbors will 



USE OF MONEY IN MAKING EXCHANGES 203 

gladly accept it in exchange for their surplus commodities. 
Such a commodity, whatever it may be, we call money. As soon 
as a society reaches the money stage of economic development 
its exchanges are greatly facilitated. No longer is it necessary 
for an individual who desires, let us say, to exchange a deerskin 
for a hat, to go about among his friends seeking another in- 
dividual who has not only an extra hat but also a desire to 
possess a deerskin. Instead, he deals with two different in- 
dividuals, exchanging his deerskin for money, and carrying the 
money in his pocket until he finds some one who has a hat for 
sale. In one respect money is a universal mobilizer of goods — 
that is, it gives mobility to the exchange of goods. If we 
were deprived of its use, a large part of the energy now 
expended in producing goods would necessarily have to be 
expended in bringing together traders possessing mutual 
demands. 

As a standard of value. — Money serves also as a standard 
of value. It is a common denominator to which all other values 
may be reduced. We speak of wheat as being worth two dollars 
a bushel, meaning thereby that two dollars exchange for a 
bushel of wheat. Similarly we speak of corn being worth a 
dollar a bushel, oats fifty cents a bushel, and eggs twenty-five 
cents a dozen. Here we have but four facts to remember, the 
prices of the four commodities under consideration expressed in 
a money unit. Without the use of money the number of 
relative values possible to express among the four commodities 
would be as follows : 

One bushel of wheat = two bushels of corn = four bushels of oats = 

eight dozen eggs. 
One bushel of corn = two bushels of oats = 
four dozen eggs. 
One bushel of oats = 
two dozen eggs. 



204 ELEMENTARY ECONOMICS 

Expressed in the form of a ratio the relative values to remember 
would be : 

Wheat : corn : : 2 : 1. Wheat : oats : :.4 : 1. Wheat : eggs : : 8 : 1. 

Corn : oats:: 2:1. Corn : eggs:: 4:1. 

Oats : eggs : : 2 : 1. 

Thus it is to be seen that there are six barter relations, whereas 
but four appear when money is used. As the number of commod- 
ities increases, the advantage of employing a money unit becomes 
more evident : ten different commodities, having a total of ten 
different values expressed in money, have forty-five relative 
values when expressed in terms of each other. 

One of the curious things about a money unit is that the 
unit itself does not necessarily have to exist. The money 
unit of the United States is the gold dollar (23.22 grains of fine 
gold), yet at the present time the government does not coin gold 
dollars. Furthermore, prices would not differ in the least from 
what they are, had no gold dollars ever been minted. Thus, 
the disappearance of every gold dollar in existence would affect 
not in the least the money unit of the United States. 

As a standard of deferred payments. — Since money serves 
so well as a medium of exchange and as a measure of value, it is 
but natural that credit transactions should be expressed in 
the same unit. An enterpriser, wishing, for example, to secure 
a new machine, borrows not a machine, but money with which 
he can purchase the machine. Nor does he expect a year 
hence to repay the loan with a machine. He borrows money and 
he repays money, both he and his creditor having every assur- 
ance that the entire transaction will be carried out in terms of 
the same unit. 

Another reason why money is usually preferred as a medium 
of credit transaction is because of its stable value. As we 
shall see in a later chapter, all money, including gold, fluctuates 
in value, yet this fluctuation is likely to be relatively small 



USE OF MONEY IN MAKING EXCHANGES 205 

for a reasonable period of time. Both debtor and creditor, 
then, enjoy a reasonable protection when money is the medium 
by which debts are to be discharged. Suppose A borrows ten 
bushels of wheat from B. agreeing to return to him at the expira- 
tion of one year the ten bushels plus interest. A bumper crop of 
wheat, accompanied by a large decrease in price, would obviously 
give A an undue advantage in repaying his loan. Conversely, a 
short crop of wheat would give B a corresponding advantage. 
No such fluctuation, we may say with assurance, will occur in 
the value of gold. 

48. Kinds of Government Money 

Gold. — The standard money unit of the United States is 
the gold dollar, weighing 25.8 grains and comprising nine parts of 
fine gold to one part of alloy. Other gold coins are double eagle 
($20), eagle ($10), half-eagle ($5), and quarter-eagle ($2^). 
All other forms of our money are directly or indirectly con- 
vertible into gold. Any holder of gold bullion, nine-tenths 
fine, can exchange it at the mint or other proper government 
depository for an equal amount of gold coin without charge. 
Hence we speak of the free and unlimited coinage of gold, free 
in this case literally meaning gratuitous ; that is, a holder of 
bullion can present 258 grains of standard gold and receive in 
return a ten-dollar gold piece. 

Inasmuch as the standard coin is made of gold, it necessarily 
follows that the price of gold cannot vary as long as that standard 
is maintained. Thus, the miner, who carries standard gold 
bullion to the mint, finds by a simple calculation (480 -^ 25.8) 
that the price of his product is $18.60+ an ounce. This price 
has not varied in many years, and it cannot vary as long as the 
present law regarding the standard coin is in operation. By 
exchanging gold coins for an equal amount of gold bullion of the 
same fineness, the government maintains a parity between gold 



206 ELEMENTARY ECONOMICS 

coin and gold bullion. In other words, the government adds no 
value whatever to gold bullion by converting it into coins. It 
merely changes the bullion into convenient forms for making 
exchanges, indicates each coin's weight by stating its value, and 
undertakes to prevent counterfeiting. Since neither the 
changing of bullion into coin nor the changing of coin into bullion 
has any effect on the value of gold, there is, as we might expect, 
a constant flow in both directions : mine owners and gold 
importers carry their bullion to the mints, while gold exporters 
change gold coins into gold bars. Thus, the government 
mints, on the one hand, and the melting pots of private in- 
dividuals, on the other, perform the valuable service of keeping 
gold coin and gold bullion equal in value. 

Silver, copper, and nickel. — The United States government 
mints also several different kinds of silver coins — dollars, half- 
dollars, quarter-dollars, and dimes. The silver dollar, which, as 
we shall presently see, was at one time a standard alongside the 
gold dollar, is composed of nine parts of fine silver to one part 
of alloy — that is, it is nine-tenths fine. It weighs 412.5 
grains, of which 371.25 grains are fine silver. The silver dollar, 
like all gold coins, is an unlimited legal tender for all debts. 
This simply means that a debtor may, unless there is a contract 
to the contrary, discharge his debts in silver dollars. The other 
three silver coins have the same fineness as the silver dollar, 
but do not weigh as much in proportion as their exchange values 
indicate. Two half dollars do not weigh as much as one dollar ; 
neither do four quarters nor ten dimes. These subsidiary coins 
are legal tender up to ten dollars. The legal-tender quality of 
the nickel piece and the copper cent is limited to twenty-five 
cents. 

Representative money. — Closely akin to the standard 
gold dollar and to the one-time standard silver dollar are the 
two forms of representative money used in the United States. 



USE OF MONEY IN MAKING EXCHANGES 207 




Copyright Underwood & Underwood, New York 

How Silver Dollaks are Stored in the United States 
Treasury. 



208 



ELEMENTARY ECONOMICS 



One, the gold certificate, is issued by the 
place of exactly the same amount of 

An Account op Resumption, from Con- 
temporary Newspaper. 

RESUMPTION. 



Peace from the Placid Potomac to the 
Warbling Wabasha 



com m ABUNDANCE EVERYWHERE, AND 
IN BUT UTILE DEUANS. 



More Gold Received at the New York Siib- 
Treasory Than Paid Out. 



Beports from Philadelphia, Chicago, St. Loois, 
and Many Othor Points. 



GENERAL FEELING OF CONFIDENCE FOR. 
A RETlVAIi OF BUSINESS. 



SPEECH OF HON. JAMES A. GARFIELD AT 
CHICAGO, ON HONEST MONEY. 



CINCINNATI. 



Resumption resumed yesterday, and nobody 
seemed hurt by it. There was about as much stir 
over it as aa though it was Lot. Theodore Cook 
remarked that it might as well have happened six 
months ago. The Merchants' National Bank didn't 
have a call for a dollar of gold. The Third National 
paid out a solitary twenty-dollar gold piece. There 
■was no demand at the National Bank of 
Commerce. The First National paid out 
f 97 50 in the yellow coin. 



government to take the 
gold deposited in the 
treasury. Similarly, 
the second form, the 
silver certificate, repre- 
sents deposits of silver. 
The chief reason for' 
substituting the former 
for gold coin is to save 
the wear and deterio- 
ration which gold suf- 
fers in passing from 
hand to hand. The 
silver certificate, Avhile 
it also serves to save 
wear on silver coins, is 
issued largely because 
it is much more con- 
venient to handle than 
silver. The main point 
to notice in connection 
with gold and silver 
certificates is that hold- 
ers may exchange them 
at the United States 
treasury for gold or 
silver, as the case may 
be. In other words, 
representative money 
merely represents gold 
or silver which the gov- 
ermnent keeps in trust 
for its holders. 



USE OF MONEY IN MAKING EXCHANGES 209 

Government credit money. — Somewhat different from rep- 
resentative money is the credit money of a government, which 
is backed not by an equal amount of gold or silver, but by a 
reserve fund plus government credit. The credit money of the 
United States government is United States notes, popularly 
referred to as greenbacks. These notes were first issued during 
the Civil War and are legal tender in unlimited amounts. For 
seventeen years their value in terms of gold fluctuated from 
forty cents to one hundred cents on the dollar. That is, they 
varied from a high point where they equaled gold in value to a 
low point where a dollar note was worth but forty cents in gold. 
Finally in 1879, after a four years' preparation, the government 
began to redeem these notes in gold, dollar for dollar. This is 
known in our financial history as the resumption of specie 
payments. Since that time they have circulated on a par with 
gold, simply because every one knows that he can exchange 
them for gold at the treasury. 

Since the government does not maintain a dollar in gold for 
every dollar of notes, the question may properly arise how the 
government is able to redeem them on presentation. The 
answer involves the whole basis of credit, which is confidence. 
The people, firmly believing in the integrity of the government, 
have confidence that it can redeem every note on demand. 
Consequently, no one presents notes for payment unless he has 
some special need for gold. They are in very much the same 
frame of mind as the bank depositor who, hearing that his 
bank was about to fail, demanded to withdraw his deposits. 
On being assured that the bank was solvent he merely remarked 
that if the bank had the money to pay him he did not want it ; 
if it did not, he wanted it at once. 

Three kinds of bank notes also circulate widely in the United 
States, but a detailed notice of them must be deferred to a later 
chapter. 



210 ELEMENTARY ECONOMICS 

EXERCISES AND PROBLEMS 

A 

1. Name various commodities that have served as money. 

2. What must be the chief characteristics of a good money ? Why ? 

3. What is meant by the expression, "large value in small bulk"? 

4. Would diamonds serve well as a medium of exchange? Why, 
or why not ? 

5. Name and explain the physical characteristics of a good money. 

6. Discuss the characteristics of a good money as applied to gold. 

7. Why is gold the most generally accepted of all money? 

8. What are the uses of money? 

9. What are the advantages of money exchange over barter ex- 
change ? 

10. What is the standard coin of the United States? 

11. Is the ten-dollar gold piece a standard coin? Explain. 

12. Does the vahie of gold fluctuate? Explain. 

13. Does the price of gold fluctuate? Explain. 

14. Why is it not unlawful to melt gold coins? 

15. Name the different silver coins in circulation. 

16. Are any of these coins standard money? Explain. 

17. Why is alloy used in the coinage of gold and silver? 

18. Why are gold and silver certificates called "representative" 
money ? 

19. Why are these certificates used in the place of coins? 

20. What are "United States notes"? 

21. Why are these notes usually referred to as "greenbacks"? 

22. Why did the value of greenbacks fluctuate during the Civil War ? 

23. Why has it not fluctuated since 1879? 

24. Is the government prepared to redeem all greenbacks on 
demand? Why, or why not? 

25. Why are relatively few greenbacks presented for redemption? 

B 

1. Give instances of where you have used money as a medium of 
exchange ; as a measure of value ; as a basis of credit. 

2. Make a collection of silver coins both new and worn. 
a. Weigh each of the dollars. 

i. What does the new dollar weigh ? 
ii. Compare it with the weight of the worn dollar. 



USE OF MONEY IN MAKING EXCHANGES 211 

b. Weigh each of the other coins. 

i. How does the weight of the new half-dollar compare with 
the weight of the new dollar? the new quarter? the new 
dime? 
ii. Compare weights of new and worn fractional coins. 

c. Which coins show the greatest proportionate wear? 

3. Get permission of some banker to examine gold coins, gold 
certificates, silver certificates, and greenbacks. 

a. Note various denominations of each. 

b. Are there denominations higher or lower than the ones 

examined ? 

c. What are the legal-tender qualities of each? 

C 

1. Suppose the federal government should decide to make a bushel 
(56 pounds) of shelled corn the standard money unit : 

a. Would gold be robbed of its value ? Why, or why not ? 

b. What difficulties would be encountered : 

1. In preventing wide fluctuations in value? 
ii. In standardizing the new money unit? 
iii. In transporting money ? 
iv. In storing money? 

c. How would the demand for representative money be affected ? 

d. How would the production of corn be affected? 

e. Would an Iowa corn farmer be richer or poorer as a result of 

the change? Why? 

2. Suppose the federal government should decide to change the 
money standard, displacing the gold dollar of 25.8 grains (nine-tenths 
fine) by a gold "diller," of equal fineness, weighing 40 grains. 

a. How would the amount of gold money in circulation be 

affected ? 

b. How would the value of gold be affected? 

c. Would the price of gold be changed? How? 

d. What would be the effect on the prices of commodities ? 

e. How would gold mining be affected? 

3. A well-known public man asserted a few years ago that anything 
would serve acceptably as a money if it bore the government fiat. 

a. Have governments been successful in creating an artificial 
currency ? 



212 ELEMENTARY ECONOMICS 

i. What was "Continental paper money"? 
ii. Sketch briefly the history of the greenbacks, 
iii. What served as money in the Southern Confederacy? 

b. How much value does the government stamp add to gold 

coins ? 

c. What causes gold coins to circulate? 

d. What causes greenbacks to circulate? 

4. "Representative paper money is not money at all; it merely 
represents money held by the government." 

a. Define "money." 

b. Does an exchange of a ten-dollar gold certificate for a ten-dollar 

gold coin change the amount of money in circulation? in 
the treasury? 

c. Suppose the government should spend the gold held to redeem 

gold certificates : 

i. Would they still be "gold certificates"? Explain, 
ii. Would they be money? Why, or why not? 
iii. How would their value be affected ? 

d. Suppose the government should declare gold certificates to be 

redeemable like greenbacks : 

i. Would they still be " gold certificates " ? Explain, 
ii. How would their value be affected? 
iii. How would the value of greenbacks be affected ? 
iv. WMat would be the effect on government credit ? 

SUPPLEMENTARY READING 

Bullock, Introduction to the Study of Economics, 3d ed., pages 224-269. 
Ely, Outlines of Economics, 3d ed., pages 248-281. 
Fisher, Elementary Principles of Economics, pages 144-164. 
Johnson, Introduction to Economics, pages 253-279. 
Seager, Princi-ples of Economics, pages 322-340. 
Seligman, Principles of Economics, 5th ed., pages 449-465. 
Taussig, Principles of Economics, 2d ed., Vol. I, pages 227-235. 



CHAPTER XVI 

MONETARY LAWS ILLUSTRATED FROM THE HISTORY 
OF THE UNITED STATES 

49. Some Important Monetary Laws 

The bimetallic ratios. — Until a comparatively recent period 
bimetallism prevailed among the more advanced industrial 
nations — that is, they employed both gold and silver money 
standards. Each government authorized its mints to manu- 
facture the standard coin in either gold or silver, their relative 
weights depending on some previously determined ratio, which 
hereafter we shall call the mint ratio. Obviously, at the same 
time there was also a inarket ratio between these metals, just 
as there is always a market ratio between wheat and corn, 
which no government can effectively control. Thus, the govern- 
ment could fix one ratio but not the other. Accordingly, the 
two ratios were seldom the same. An influx of gold into any 
country tended to cause the value of that metal, as compared 
with silver, to fall, while an outflow of gold tended to cause its 
value to rise. In the first case gold was said to be overvalued ; 
in the latter, undervalued. Both terms, as used in discussions 
on bimetallism, create unnecessary confusion, which any one 
of us, by exercising a little caution, can avoid. Both terms 
apply to the value set by the mint. If an oversupply of gold 
causes, as we have seen, the value of that metal to decline in 
the markets in terms of silver, then at the mint, where the ratio 
remains constant, it is obviously overvalued. Similarly, an 
undersupply of gold causes it to be undervalued at the mint. 

213 



214 



ELEMENTARY ECONOMICS 



To give concreteness to our subject let us assume that a 
government fixes the mint ratio at 15 to 1, which means that 
the standard silver coin shall weigh exactly fifteen times as 
much as the standard gold coin, the two coins having the same 
fineness and the same legal-tender value. If in the market of 
that country an ounce of gold will buy twenty ounces of silver, 

World Production of Silver : 1865-1915 
(In Millions of Ounces) . 







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then it is clear that gold is undervalued at the mint ; and that 
silver is overvalued. Conversely, if an ounce of gold exchanges 
in the market for less than fifteen ounces of silver, fourteen say, 
then silver is said to be undervalued and gold overvalued. The 
inability of any government to change its mint ratio to corre- 
spond with the daily shifting market ratio accounts in large 
measure for the difficulties encountered in trying to maintain 
a bimetallic standard, and for its abandonment, as practically 
all of the leading countries have done. 



MONETARY LAWS 215 

Gresham's law, — Under a system of bimetallism the coins 
made from the undervalued metal tend to go out of circulation. 
The reason for this is not difficult to understand, since the under- 
valuation of a metal means that it has higher value in the market 
than at the mint. Payments will be made preferably with the 
coins of the overvalued metal ; with the result that the coins 
of the other metal will be used only as a last resort. Thus, 
when coins of two standard metals circulate side by side, the 
coins which are worth less as metal than as money will tend to 
drive out of circulation the coins which are worth more as metal 
than as money. The same tendency occurs when similar 
standard coins are circulating, if some of them are worn more 
then others; also when metal money and paper money cir- 
culate, if the paper money is depreciated. We are now pre- 
pared to state what is generally known as Gresham's law, 
named after one of the advisers of Queen Elizabeth : When 
two kinds of money circulate concurrently, the poorer tends to 
drive the better out of circulation. An American writer puts it 
forcefully when he says that good money is too proud to 
circulate alongside poor money. 

Principle of elasticity of money. — A third important mone- 
tary law involves the relation of the supply of money to the 
fluctuations of the demand made on this supply. In every 
modern business community there is more or less of a seasonal 
demand for money in some form. Particularly is this true in 
agricultural sections at harvest time. Then farmers hire 
additional laborers who must be paid, and incur other expenses 
incidental to harvesting. In a large country such as the United 
States this seasonal demand mounts into hundreds of millions 
of dollars. Clearly, business operations cannot be adjusted so 
as to have on hand this enormous sum of money to meet the 
extra demands of a few months at most. And it need not be so 
adjusted if some provision is made, such as we now have in our 



216 ELEMENTARY ECONOMICS 

Federal Reserve Banking Law, for increasing the amount of 
money to meet an additional demand and decreasing it again 
when this demand has passed by. A monetary system which 
permits of this expansion and contraction is said to be elastic. 

From our description of elastic money we readily see that 
credit money alone, either in the form of bank notes or of 
government notes, serves the purpose. No reasonable scheme 
can be had which would permit metallic money to stretch and 
contract with the fluctuation of business needs. Mine pro- 
duction could not be speeded up sufficiently to meet an in- 
creased demand ; and if such were possible we can think of no 
plan for taking the added amount out of circulation when there 
was no longer need for it. 

Quantity theory of money. — Whatever the permanent supply 
of money may be, it will adapt itself to the social needs for 
money. A given quantity of money, say 10a;, effects the 
exchanges of a country. If this quantity were increased to 12a;, 
we know, speaking generally, that the new amount (12a:) will 
be used in effecting the same kinds and number of exchanges as 
10a; had formerly effected. Thus, in each exchange twenty 
per cent more money will be used than was the case before the 
increase — that is, goods in every case will command more 
money when the quantity is 12.T than when the quantity was 
10a;. Measured in terms of goods, the value of money has 
declined. We may now state the quantity theory of money : 
Other things being equal, the value of the nioneij unit varies inversely 
with the supply of money. 

50. Monetary History of the United States 

Notes of the first and second United States Banks. — During 

the greater portion of the first half century following the 

organization of the national government in 1789, the notes 

issued by the two United States Banks (first, 1791-1811; 



MONETARY LAWS 



217 



second, 1816-1836) supplied the most important part of the 
country's circulating medium. Each bank kept an adequate 
reserve of coin with which to redeem its notes. Consequently, 
the people accepted them at their face value. Numerous state 
banks also issued notes, which usually had scarcely more than 
a local circulation in the neighborhood of the issuing bank. 

Government coinage. — Very soon after the organization 
of the first United States Bank, the government provided a 

World Production of Gold: 1850-1915 
(In Millions of Dollars) . 



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bimetallic coinage system (1792) in which the ratio was to be 
15 to 1. For many years after its estabhshment the mmt 
coined comparatively little silver or gold : there were few mines 
in the country, foreign coins passed current, while the United 
States banks, as we have seen, provided a sound and uniform 
currencv. In 1834 the mint ratio was changed to 16 to 1. All 



218 ELEMENTARY ECONOMICS 

the while the market ratio was in the neighborhood of 15|- to 1. 
Hence, the first coinage law (1792) undervalued gold ; the second 
(1834) undervalued silver. Neither law, despite the best 
efforts of the lawmakers, caused gold and silver to circulate side 
by side. The holder of either metal — coin or bullion — ■ 
followed his own economic advantage ; he paid out his over- 
valued coins and sold or exported his undervalued ones. Since 
the law of 1834 tended to drive silver out of circulation by under- 
valuing it, the fractional silver coins (half-dollar, quarter-dollar, 
and dime) disappeared. Consequently, in 1853 the weights of 
these coins were slightly reduced in order to make them worth 
more as money than as bullion. Since that time the weights 
of all our gold and silver coins have remained unchanged. The 
discovery of gold in California in 1848 gave an impetus to gold 
coinage. A little later the mints were turning out gold coins in 
excess of $25,000,000 annually. During this period an impetus 
was given to the use of gold and silver as money by the govern- 
ment itself, which refused to recharter the second United States 
Bank (1832), to accept state bank notes in payment for public 
land (1836), and to use state banks as public depositories (1846). 
Government paper money. — When the Civil War broke out, 
the circulating medium of the country comprised gold coins, 
fractional silver coins, copper coins, and state bank notes. 
Soon the state banks, as we shall see in the next chapter, were 
compelled to suspend specie payments — that is, they were no 
longer able to redeem their notes in gold or silver. At the same 
time the government itself also suspended specie payments. 
The result was a serious derangement of the monetary system. 
Congress then set about to remedy the situation. The secretary 
of the treasury was authorized (February, 1862) to issue $150,- 
000,000 in United States notes (greenbacks). Four months 
later Congress authorized a second issue of the same amount. 
Subsequent issues brought the total amount up to $450,000,000 



MONETARY LAWS 219 

The government had no reserve of gold and silver with which 
to redeem these notes. Hence we call them irredeemable or 
inconvertible paper money. 

National bank notes. — The year following the issuance of 
the first greenbacks Congress passed the National Bank Act 
(1863), which provided for the establishment of banks with 
federal charters. These banks were required to invest in 
government bonds, which they could use as security for national 
bank notes. Two years later the government gave to the 
national banks a monopoly of bank-note issue by imposing a 
prohibitive tax on state bank notes. In reality the govern- 
ment's credit served as the basis of national bank notes as well 
as of greenbacks, for neither were redeemable at the time 
in specie. During the war and for a dozen years after its 
close, gold was kept out of circulation by the operation of 
Gresham's law. The only money the people in general saw 
during this period was greenbacks and bank notes. Gold was 
bought and sold just as was wheat or corn. Any one desiring 
gold for export could always find it for sale at the New York 
Stock Exchange in what was known as the " gold room." 
There, also, the importers of gold could find buyers. The heavy 
issues of greenbacks and bank notes caused prices to rise, 
since, as we have seen in the discussion of the quantity theory 
of money, the value of the dollar declined. Another objection 
to both greenbacks and bank notes was that they were in- 
elastic. The government could not regulate the amounts of 
either or both to meet the seasonal demands for money. In 
this respect they were little better, if any, than gold or silver 
coins. 

Resumption of specie payments. — Soon after the close of 
the war there arose an agitation to retire the greenbacks from 
circulation, and to return to a " hard money " basis. Many 
people objected. Finally the issue was compromised, with a 



220 ELEMENTARY ECONOMICS 

moderate reduction of the amount in circulation. The next 
logical step was to devise some plan for redeeming them on 
demand, when presented at the treasury. After considerable 
debate and discussion both in and out of Congress, a law was 
enacted (1875) which provided that beginning with January 1, 
1879, the government would pay specie for greenbacks. In 
anticipation of the demand that might be made on him, the 
secretary of the treasury began to accumulate a gold reserve, 
which, by the end of 1878, amounted to more than a hundred 
million dollars. As January 1, 1879, drew near, the premium 
on gold declined until it disappeared. Contrary to expectations 
the people did not rush to the treasury to exchange their 
greenbacks for gold. The mere fact that the gold was there 
sufficed. 

The silver question. — Two years prior to the passage of the 
resumption act, the government, in revising its coinage laws, 
omitted any mention of the standard silver dollar. In other 
words, the law demonetized silver. This legislation is usually 
referred to as the " crime of '73." At that time the market 
value of the 371.25 grains of fine silver necessary to coin a dollar 
was about $1,003 in gold. Hence no one was willing to carry 
silver bullion to the mint, for by so doing he would be compelled 
to exchange $1,003 for $1.00. It happened, however, that just 
about this time a great many rich silver mines were opened in 
the western part of the United States. Consequently, the value 
of silver fell until its market value was less than the old mint 
value — it fell to a point where it required more than 16 ounces 
of silver to buy one ounce of gold. Then the silver miners and 
their friends demanded that the government go back to a bime- 
tallic basis. This a majority in Congress was unwilling to do. 
The matter was finally compromised in 1878 with the enactment 
of the Bland-Allison Law, which provided that the secretary of 
the treasury should purchase each month from two to four 



MONETARY LAWS 



221 



million dollars' worth of silver, paying silver certificates for it. 
Silver production continued to increase. In 1890 another law, 
known as the Sherman Act, was passed. It required the secre- 
tary of the treasury to purchase four and one-half million 
ounces monthly, and to issue in payment treasury notes redeem- 
able in gold. This new strain was too much for the gold reserve, 



Market Value of the Silver Dollar in Terms of Gold : 
1865-1918. 





1855 
1860 

1865 

1870 

1875 

1880 

1885 

1890 

1895 

1900 

1905 

1910 

1915 
1920 


100* 








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for holders of silver bullion after accepting the treasury notes 
were privileged to present them forthwith for redemption. 

The government was now at a point where it had to meet the 
silver question squarely and without flinching. In 1893, at the 
instigation of President Cleveland, Congress repealed the 
Sherman Act. This was the signal for the friends of bimet- 
allism to make silver more of a political issue than ever before. 
Three years later the Democrats, led by William J. Bryan, made 



222 ELEMENTARY ECONOMICS 

free silver their paramount issue. They pledged themselves, if 
returned to power, to remonetize silver, making it equal to gold 
at a ratio of 16 to 1. The Republicans declared for a single 
gold standard. Each party was divided over the issue. The 
" Gold Democrats " nominated a ticket of their own, while 
many western Republicans supported Mr. Bryan. The Re- 
publicans carried the day, their candidate, William McKinley 
of Ohio, being elected president. Four years later (1900) the 
so-called gold-standard act was passed, which provided definitely 
that the monetary standard of the United States should be the 
gold dollar of 25.8 grains, nine-tenths fine. 

The experiences of the United States in its monetary legis- 
lation has been paralleled in every other modern nation. Every 
one of them has experienced the same difficulties, particularly in 
trying to maintain a bimetallic standard. England was the first 
to adopt the single gold standard (1816). Other European 
nations held back. Finally one by one they had to abandon 
their attempts to keep gold and silver at a fixed ratio, until now 
every country of any great importance is on a gold basis. 

Federal Reserve Bank notes. — The final settlement of the 
silver question went far to stabilize our monetary system, 
but it did not add elasticity to our money. Finally, under the 
stress of a panic (1907), the large banks of the country issued 
clearing-house certificates on their own credit backed by the 
commercial paper which they had in their vaults. It was at 
once seen that this pointed to the solution of the vexed problem 
of elasticity. Accordingly, Congress authorized a close study 
to be made of the monetary systems of Europe and America. 
The result was the Federal Reserve Bank Law of 1913, which 
provided that regional banks, twelve in number, can issue federal 
reserve notes to member banks in exchange for promissory notes 
given to them by their customers, and for other securities. The 
result is an elasticity in our currency. Now when a bank needs 



MONETARY LAWS 



223 



money to meet an extraordinary demand it can get it quickly 
from its regional bank. Further discussion of this system, 
however, must be deferred to the next chapter. 

Amount of Federal Reserve Notes in Circulation 
(In Billions of Dollars). 



2% 



Jan., 191S 
July, 1915 


o 


O 

3 


i 


3 


o 


>; 


i 




Federal Reserve Notes First Issue, November, 1914 
Declaration of War, April, 1917 


/ 




Fourth Liberty Loan, October, 1918 
Armistice Signed, November, 1918 


/ 


/ 












/ 


/ 






__^ 




^ 




^ 









2V4 

iy2 



Monetary stock of the United States. — As a result of the 
various monetary laws we have, exclusive of one-cent and five- 
cent pieces, ten different kinds of money, all based on the stand- 
ard gold dollar. 



Gold Coins. 
Gold Certificates. 
Silver Dollars. 
Silver Certificates. 
Fractional Silver Coins. 



Treasury Notes. 

United States Notes (greenbacks). 
Federal Reserve Notes. 
Federal Reserve Bank Notes. 
National Bank Notes. 



Gold certificates, as we have already seen, merely represent 
gold coin and may be exchanged for it at the treasury. The 
government is prepared also to exchange gold directly for 
silver dollars and fractional silver coins, and indirectly for 



224 ELEMENTARY ECONOMICS 

silver certificates. The various notes too can be exchanged 
either directly or indirectly for gold. Thus we see that the 
holder of any form of American money can get gold for it, if 
he proceeds in the right manner. Because of this significant 
fact, Gresham's law is iroperative ; that is, there is no good 
and no poor money. 

EXERCISES AND PROBLEMS 



1. Distinguish between the mint ratio and the market ratio. 

2. Under what circumstances is gold undervalued? 

3. Why is a system of bimetallism difficult to maintain? 

4. What is meant by the expression "elasticity of the currency"? 

5. Why was the mint ratio changed in 1834? 

6. Which metal circulated between 1792 and 1834? after 1834? 

7. What was the "crime of 73"? Who called it a "crime"? 
Why? 

8. Why were silver dollars not being coined in 1872? 

9. Who began the agitation to remonetize silver ? Why ? 

10. Point out the essential differences between the Bland-Allison 
Act and the Sherman Silver Purchase Act. 

11. Just how does the Federal Reserve Bank Law give elasticity to 
the currency? 

12. Name the various kinds of money in circulation in the United 
States. 

13. Why do all of them pass at their face value ? 

B 

1. Enumerate the various kinds of metals used in making United 
States coins. 

a. Why are different metals used? 

b. Which of these metals does the government coin freely ? 

c. How does it get the other metals for coinage? 

d. Just exactly what does the expression ' ' monometallism ' ' mean ? 

2. What procedure is necessary to exchange each of the various 
kinds of money for gold? 



MONETARY LAWS 225 

3. Learn from some banker or newspaper the present market ratio 
of silver to gold. 

a. What changes have occurred in this ratio during the past few 

years ? 
6. How did these changes affect the profits of the government in 

supplying fractional coins ? 
c. What would be the effect if the government should now return 
to bimetallism with a ratio of 16 to 1 ? 



C 

1. During the free-sUver campaign of 1896 many believed that a 
change of the mint ratio to equal the market ratio, which was then 
about 32 to 1, would be desirable. 

a. What was the basis of this belief ? 

h. Would the adoption of the proposed change have solved the 
problems arising from bimetallism? Explain. 

2. The story is told of a congressman who, when he heard a colleague 
state that the flow of gold from the United States was due to the action 
of Gresham's law, suggested that the law be repealed. Comment. 

3. The operation of Gresham's law is closely associated with every- 
day business affairs. 

a. Of two dimes which is usually spent first, Canadian or United 

States ? 
h. Of two five-dollar gold pieces, one new and the other worn, 

which would be melted down for the purpose of making a 

ring? 

c. Would new or Avorn gold coins be shipped to England in pay- 

ment for goods ? 

d. Give definite reasons for each of the three answers. 

4. How, if at all, would the value of money tend to be affected by : 
a. The opening of new gold mines? 

6. An increase in the production of goods ? 

c. An increase in population ? 

d. An increase in the rapidity of the circulation of money ? 

e. A greater practice of thrift ? 

/. An increase in the volume of banking business? 
g. A change in the weight of the gold dollar? 
h. Increased efficiency in manufacturing ? 



226 ELEMENTARY ECONOMICS 

SUPPLEMENTARY READING 

Bullock, Introduction to the Study of Economics, 3d ed., pages 294-314. 

Ely, Outlines of Economics, 3d ed., pages 248-269. 

Fetter, Economics, Vol. II, pages .56-60. 

Fisher, Elementary Principles of Economics, pages 223-232. 

Seager, Principles of Economics, pages 322-340. 

Seligman, Principles of Economics, 5th ed., pages 493-509. 

Taussig, Principles of Economics, 2d ed.. Vol. I, pages 265-289. 



CHAPTER XVII 
BANKING AND ITS HISTORY 

51. Development of the Principle of Banking 

The medieval money-lenders. — Even in the Middle Ages, 
when industry was backward and most of the exchanges were 
carried on by barter, there were accumulations of capital in the 
form of gold and silver. Kings levied taxes and maintained 
treasuries ; and borrowed great sums with which to carry on 
war, to make crusades, or to provide dowries for their children. 
Merchants and traders, too, often needed more ready money 
than they themselves possessed. Consequently, there grew 
up a class of men, confined largely for religious reasons to 
the Jews and the Lombards, who, seeing the advantages of 
making loans, kept their wealth liquid — that is, in the form of 
gold and silver. Obviously, they were compelled to take meas- 
ures for protecting themselves against thieves. Soon, we may 
believe, their neighbors who had surplus funds of their own began 
to leave their money with these lenders for safe-keeping. 

Discovery of the balance. — In the course of time the money- 
lenders (bankers) made an important discovery. They found 
that their neighbors (depositors), possessing a variety of 
" money habits," left a portion of their combined deposits in 
safe-keeping all of the time ; that is, there was a balance, varying 
in amount from day to day, which the banker might use as if it 
were his own. With this knowledge in hand the banker em- 
ployed a portion of the balance in his own business or, as was 

227 



228 ELEMENTARY ECONOMICS 

more often the case, loaned it out to those who had need for 
money and who could give proper security. Here, it is be- 
lieved, is the origin of modern banking. 

In conducting his business in this manner the banker ran the 
risk of being unable to meet unexpected demands by his de- 
positors. To forestall such a calamity he had to be on his 
guard at two points. First, he made loans only for short periods 
of time and on good security. To use a modern banking term, 
he kept his funds liquid. Second, he kept a portion of the 

Bank Check. 



Ponton, itiasig., c-. ^ ^/ /^ / 191^ £o,2^^ 

pilgrim ^tate Panfe of Positon 



62 







balance as a reserve, the size of which depended on his experience 
as a banker and on the margin of risk which he cared to assume. 
Later, bankers developed a plan of issuing their own promises 
to pay (bank notes) to borrowers, undertaking to redeem them 
on demand. Here again they discovered that some of these 
notes would always be in circulation. Consequently, they kept 
on hand only enough gold or silver to redeem the notes as they 
were presented. Naturally the next step which the banker 
took was to grant business men the right to check on him, 
each securing the amount of his credit by giving the banker 



BANKING AND ITS HISTORY 229 

security in the form of a promissory note. From this discussion it 
may be seen that the banking business is built on confidence, and 
that without it there would be neither balances nor note issues. 
The two chief functions of a bank, then, are (1) to receive 
deposits in the form of money or credit and in turn to lend 
money on credit, and (2) to issue notes. In this country no 
bank, strictly speaking, possesses the second function. Its 
business, therefore, is confined chiefly to the first function, 
though it may and does perform many minor ones. 

52. Different Kinds of Banks 

Commercial banks. — The most common bank of all is the 
commercial bank, which may be a national bank, a state bank, 
or a private bank. It gets its name from the fact that it confines 
its business largely to business men, receiving their deposits 
and cashing their checks as they come in. Commercial bank 
loans are almost invariably for short periods of time, usually 
thirty, sixty, or ninety days. Hence its funds are liquid. Con- 
trary to the generally accepted notion among some classes of 
people, a commercial bank is anxious for its customers to borrow 
its funds for carrying on their business. Its profits depend 
almost entirely on its volume of loans, and its prosperity is 
intimately bound up with the prosperity of its customers. For 
these reasons the typical American banker encourages legitimate 
business expansion, and treats his borrowers with the greatest 
liberality consistent with safety. He is in fact more of a public 
official than most people think, for his business must be con- 
ducted with due regard for the well-being of society as well as 
for private gain. 

Savings banks. — A savings bank differs materially from a 
commercial bank. First of all, a true savings bank is a mutual 
affair conducted primarily for the benefit of its depositors, 
though in some sections of the country stock savings banks may 



230 ELEMENTARY ECONOMICS 

be found. In states where there are no savings banks, that 
function is performed by the various commercial banks. 
Savings banks usually receive deposits of one dollar and upward 
on which they pay interest, do not pay out money on checks 
drawn against deposits, and may require a formal notice of 
several days before deposits can be withdrawn. Unlike com- 
mercial banks, savings banks usually contract loans for a year 
or more. This they are able to do for two reasons. First, 
they seldom have extraordinary demands made on them by 
depositors ; and second, their privilege to compel depositors to 
serve formal notice of withdrawal gives the opportunity to raise 
the required cash from the sale of mortgages, bonds, or other 
securities. Savings banks, by receiving small amounts and 
paying interest, encourage thrift; their aggregate deposits, 
exceeding five billion dollars, comprise an important source 
from which industry can draw capital. 

Trust companies and investment banks. — Many of the 
states charter trust companies, which perform in general the 
functions of commercial banking with some additional func- 
tions, such as executing trusts, and guaranteeing titles to land. 
Some of our largest banks are trust companies. A fourth type 
of bank, the investment bank, is usually a private institution, 
which concerns itself primarily in promoting the affairs of large 
industrial organizations. Such a bank is that of J. P. Morgan 
and Co. of New York. This bank has had a hand in organizing 
some of the largest industrial concerns in the country, notably 
the steel trust. It also takes an active interest in international 
banking, maintaining branch banks in the more important 
foreign financial centers. 

The Federal Reserve Banking Law, however, authorizes 
national banks to engage in foreign banking, and some of them, 
notably the National City Bank of New York, are rapidly de- 
veloping in this respect. 



BANKING AND ITS HISTORY 



231 



53. A Bank Statement 

Form of a bank statement. — Banks from time to time are 
called on for financial statements. Such a statement indicates 
clearly the condition of the bank making it. On one side are 
arranged the bank's resources ; on the other its liabilities. The 
totals must always he the same; that is, at all times a bank's 
resources exactly equal its liabihties. Since a bank as such is 
an inanimate and impersonal being it cannot own property or 
have debts in excess of its resources. This point usually proves 
to be a stumbUng block for students, which, however, can be 
removed with a little care. A great many items enter into a 
bank statement, but for our purpose we need only choose a few 
of the most important ones. 



Resources 
Loans and discounts 
Stocks and bonds . 
Real estate . . . 
Cash on hand . . 
Due from other banks 



Liabilities 
,000 Capital $100,000 



30,000 
20,000 
30,000 
45,000 
$725,000 



Surplus .... 
Undivided profits 
Deposits . . . 
Due to other banks 



40,000 

10,000 

550,000 

25,000 

$725,000 



The statement explained. — Obviously the largest and most 
significant item among the resources of a commercial bank is 
loans and discounts. The difference between a loan and a 
discount is not important for our purpose in this connection. 
In one case the borrower receives the full amount of his prom- 
issory note, paying interest on his loan at its maturity; in 
the other, he has his note discounted, which means that he 
pays interest in advance, having it deducted from the amount 
shown on the face of his note. He may even offer for discount 
the notes of his debtors. This 'last transaction is known as re- 
discounting. A bank for one reason or another is likely, at any 
time, to possess stocks and bonds, though the smaller commercial 



232 ELEMENTARY ECONOMICS 

banks prefer to confine their investments to loans and dis- 
counts. Real estate may include, not only the banking house 
and its site, but also other real estate items, such as a farm or a 
city lot. The meaning of cash on hand is obvious. Every 
commercial bank, in order to meet the daily demands of its 
depositors, must keep on hand a supply of money the amount of 
which is regulated by sound business practice as well as by law. 

Promissory Note. 



^_Jj2/2ji^ Hansas Citp, ma^^^a^ y, /.Wf 







yy/ y^ Jfourtf) jg^ational Panfe of ikangag Citp. 



The last item among resources, which for all practical purposes, 
is a cash item, includes all money owed by other banks. Usually 
it may be had on demand. 

More difficult to understand are the items on the liability 
side of the statement. At first thought capital is likely to 
appear as a resource instead of a liability. It will be an aid to 
clearness if we remember that our statement represents the 
affairs of a bank and not the affairs of a banker. Since the bank 
owes its owners the amount of its capital stock, clearly, then, 
capital is a liability. Surplus and undivided profits are liabilities 
for exactly the same reason. The one is earnings set aside by 



BANKING AND ITS HISTORY 233 

the directors to strengthen the capital ; the other, earnings 
which may eventually be either paid to stockholders in the 
form of dividends or placed in the surplus fund. Deposits 
possess two important aspects. First, a deposit may represent 
an actual deposit of money in a bank, which the depositor may 
withdraw on demand. Most people believe that a deposit 
may be made in no other way. In holding the belief, however, 
they are mistaken. Bank customers deposit not only money, 
but also the proceeds of their own promissory notes. A clothier, 
for example, fearing that he will not have enough money to meet 
the payments of his spring bills, may arrange with his bank to 
credit his account with the amount necessary to meet them as 
they come due, securing the bank with a promissory note. 
Thus, obviously, a deposit may be made without the use of 
money. Among bankers such a deposit is known as a created 
deposit ; and the checks drawn against it, as well as all other 
checks, are known as deposit currency. The last liability, due 
to other banks, shows the amount our bank owes to other 
banks. 

54. Banking in the United States 

Periods of banking history. — Some attention has already 
been given to the banking history of the United States in so far 
as it relates to note issue — issuing of paper money. We may 
now properly examine with some detail the part these in- 
stitutions played in the industrial development of the country. 
As a mere matter of convenience, the banking history of the 
United States may be divided into four periods : (1) the United 
States banks (1791-1835) ; (2) state banking (1836-1863) ; 
(3) national and state banking (1863-1913), (4) Federal 
Reserve banking (1913-19 — ). 

The United States banks. — When the national government 
was organized in 1789 there were but four banks in the whole 



234 ELEMENTARY ECONOMICS 

country. Alexander Hamilton, secretary of the treasury, and 
others recognized the need for a banking institution to assist 
the government in handling the public debt and in transmitting 
government funds from one section to another. Accordingly, 
in 1791 Congress and the President (Washington) chartered 
the first United States Bank, giving it, as far as the national 
government was able, a monopoly of banking for a period 
of twenty years. The capital stock was fixed at $10,000,000, 
of which the government was to own one-fifth. At the end of 
twenty years, when Congress refused to renew its charter, the 
bank went out of existence. 

During the next five years the banking business of the country 
was carried on by state banks — that is, banks operating under 
state authority. By 1816, however, it had become apparent 
that another United States Bank was necessary to provide a 
uniform and sound currency and to assist the government in 
handling the public debt created by the Second War with Eng- 
land (War of 1812). Accordingly, Congress and the President 
(Madison) chartered the second United States Bank. The 
life of the new institution was twenty years ; and its capital 
stock was $35,000,000, one-fifth of which was to be owned by 
the government. Besides issuing notes, the second United 
States Bank served as a depository for public and private funds, 
bought and sold domestic and foreign exchange, and made loans 
to business men. As yet the practice of using bank checks was 
confined to a relatively few. The bank, after getting a bad 
start, became prosperous and fulfilled the expectations of its 
supporters and friends. Unfortunately, it was drawn into 
politics about 1830. In 1832, Congress passed a bill re- 
chartering the bank, which President Jackson vetoed. The 
next year the government ceased to use the bank as a depository 
for public funds. At the expiration of its charter the second 
United States Bank became a state bank; and the second 



BANKING AND ITS HISTORY 235 

experiment of the United States in creating a large central 
bank was at an end. 

State banking. — It must not be thought from what has been 
said that either of the two United States banks had enjoyed a 
monopoly. Numerous state banks competed with them, and 
opposed them at every point. This opposition, in fact, accounts 
in large measure for their do^vnfall. President Jackson's veto 
in 1832 caused many other state banks to be organized. During 
the next thirty years the banking business was characterized 
by over-expansion and uncertainty. Many banks issued notes 
with little regard for their redemption, and undertook financial 
enterprises out of all proportion to their resources. During 
this period, however, there was developed the idea of free 
banking. Hitherto it had been the practice for state legislatures 
to grant special banking charters, thus opening the door to 
favoritism and even graft. A free banking law, on the con- 
trary, permitted the establishment of a bank whenever a group 
of men who desired to do so could comply with a general banldng 
law. No doubt the result was an increase in the number of 
banks in the country. Yet bankers, as never before, felt 
the necessity of conducting their business on a high plane, 
since they were no longer protected by the difficulties which 
competitors would have in getting charters. Such was the 
banking situation when the Civil War opened. 

National and state banking. — The National Bank Law of 
1863 did not abolish the state banks. It merely set up another 
system of banking alongside them. Since that time the two 
systems have grown and prospered; the chief difference be- 
tween them being, as we have seen, that national banks may 
issue notes secured by government bonds. The notion generally 
prevails that national banks are sounder and stronger than their 
state competitors. This, however, is the case only where, 
capital and business integrity being equal, state laws are more 



236 ELEMENTARY ECONOMICS 

lax than federal laws. Fortunately, the states have become more 
strict in their requirements, until now many state banks are as 
rigidly supervised as are national banks. It is true that the 
largest commercial banks in the country operate under federal 
charters, yet some of the oldest and soundest banking in- 
stitutions in our largest cities are state banks. 

No account of banking since the Civil War would be complete 
without a notice of commercial private banking. In some of the 
states, banks, so far as the law is concerned, are as easily 
established as grocery stores or restaurants. In those states 
any man can become a banker by announcing that fact. To 
be sure, if he expects to do any business, he must secure a 
money safe and a set of books, and above and beyond all else 
he must possess the confidence of his neighbors and business 
associates. Such a bank often serves as good a purpose in a 
rural community as would a national or state bank. But in 
the cities, where even next-door neighbors are unacquainted, 
the private commercial bank . is usually undesirable. This 
statement is particularly true of unregulated private banks 
operated in foreign sections. There the people, being strangers 
to our methods of carrying on the banking business, look on a 
bank as a bank whatever may be the character of its organi- 
zation. They do not understand that national banks are 
carefully supervised by the federal government ; and state 
banks, by the state. Since private banks usually have no such 
supervision, customers doing business with them are ordinarily 
compelled to carry a heavier risk than would be necessary in 
dealing with a national or state bank. 

Federal Reserve banking system. — Profiting by an ex- 
perience of more than a half century, the federal government in 
1913 provided for uniting the banking strength of the country 
without robbing the banking business of its competitive char- 
acteristics — that is, provision was made for centralizing bank- 



BANKING AND ITS HISTORY 237 

ing without establishing a central bank. The bank law of that 
year — the Federal Reserve Bank Law — created a bank board 
to sit at Washington which should have general charge of the 
twelve regional reserve banks, one bank being situated in each 
of the twelve districts into which the United States is divided. 
It provided also a board for each of the regional banks, and 
required every national hank in the country to become a member 
bank of its regional bank. Furthermore, it permitted state 
hanks to become members, provided they carried on their 
business according to certain specified requirements laid 
down in the Reserve Law itself. 

We have seen already how this new law has favorably affected 
the elasticity of the currency. It is an improvement over 
preceding banking laws in other ways. First, it tends to keep 
the money of the country from collecting in the New York 
banks, as was formerly the case, by requiring each of the regional 
banks to maintain large reserves of gold. Second, it provides 
that member banks may, by complying with certain require- 
ments, borrow from their respective regional banks.. Third, it 
facilitates the collection of checks drawn on one bank and 
cashed by another, by providing that regional banks shall be 
clearing houses. Finally, but not the least important by any 
means, it reduces the reserves which national banks were 
formerly compelled to carry for the protection of depositors. 
From whatever angle we may regard the Federal Reserve Law 
and its operation, we must conclude that it is by far the best 
banking legislation the United States has yet enacted. 



238 ELEMENTARY ECONOMICS 

EXERCISES AND PROBLEMS 



1. Who were the Lombards? 

2. Why did not the Christians ordinarily loan money ? 

3. Why may a banker expect to have a balance in his hands ? 

4. What is the difference between bank deposits and bank notes? 

5. What are the essential differences between a commercial bank 
and a savings bank? 

6. Why does a bank desire to loan its money? 

7. What is the difference between a commercial bank and a trust 
company ? 

8. What are the functions of an investment bank? 

9. What is a " bank statement " ? 

10. What is the difference between a loan and a discount? 

11. Why is a bank's capital a liability? 

12. Would the banker consider his investment a liability? Explain. 

13. Define "bank deposit." 

14. How does deposit currency differ from other kinds of currency? 

15. How did the two United States banks differ from state banks? 

16. Describe state banking between 1832 and 1863. 

17. How did the National Bank Act affect banking in the United 
States? 

18. In what respects did the Federal Reserve Banking Law improve 
banking ? 

19. Just how, if at all, was this system instrumental in selling 
Liberty Loan bonds? 

20. Locate the regional banks. 



1. Make a list of the banks in your community. 
a. Which of these are : 
i. Commercial banks? 
ii. Savings banks? 
iii. National banks? 
iv. State banks? 
V. Private banks? 



BANKING AND ITS HISTORY 239 

b. Which has the largest capital? the smallest capital? 

c. Which are members of the Federal Reserve Regional Bank? 

d. Which own bank buildings ? which rent ? 

2. Get a bank statement from some banker or from a newspaper. 

a. Which kind of a bank is it (national, state, etc.)? 

b. Inquire of some banker about any items you don't understand. 

c. Divide the "cash on hand" by the "total deposits." 

i. What does the result show? 
ii. Do you consider this a safe margin? Why? 

d. Can you judge the age of the bank by its statement ? Explain. 

3. Suppose you were one of ten persons to make equal deposits of 
money ($1000) in a bank, and that there are no other depositors. 

a. Will the banker be likely to loan any of this $10,000? Why? 

b. Is it correct to say that you have $1000 in this bank. Why? 

c. Would the other nine persons be justified in making the same 

statement ? 

d. Have the ten of you $10,000 in this bank? 

e. State exactly what each of the ten has. 
i. Is it money in the bank ? or 

ii. Is it the right to demand money of the bank? 

4. Examine a bank check. 

a. How many names appear on the cheek? 

b. Notice that it is payable on demand. 

c. How many times and in what ways does the amount named in 

the check appear? 

d. What is the difference between a bank check payable to 

bearer and one payable to order ? 

e. Would a check be a legal claim if it were written on a sheet 

of paper twelve inches square? on the margin of a news- 
paper? on a cuff? 

C 

1. Turn to any bank statement such as the one shown in this chapter, 
and determine how it would appear after each of the following trans- 
actions has been completed : 

a. A deposit of $10,000 in money. 

h. A 60-day note for $2000 is discounted at 6% and one-half of 

the proceeds is left on deposit. 
c. A check for $1000 is cashed. 



240 ELEMENTARY ECONOMICS 

d. $3000 of the undivided profits are credited to stockholders. 

e. A note of $5000 is paid in cash. 

/. Bonds having a face value of $1000 are sold for $1050. 
2. Explain why the following are liabilities : 

a. Deposits. 

b. Capital. 

c. Surplus. 

d. Undivided profits. 

SUPPLEMENTARY READING 

Bullock, Introduction to the Study of Economics, 3d ed., pages 279-288. 

Ely, Outline of Economics, 3d ed., pages 282-315. 

Fetter, Economics, Vol. II, pages 95-129. 

Johnson, Introduction to Economics, pages 280-302. 

Seager, Principles of Economics, pages 341-356. 

Seligman, Principles of Economics, 5th ed., pages 518-553. 

Taussig, Principles of Economics, 2d ed., Vol. 1, pages 331-399. 



CHAPTER XVIII 
DOMESTIC AND FOREIGN COMMERCE 

55. Nature and Volume of the Trade of the United 

States 

Local trade. — Despite the elaborate territorial division of 
labor which this country enjoys, there still remains, in addition 
to retailing, a considerable volume of local trade. Most farmers 
have surpluses of eggs which they exchange for groceries, while 
many of them follow the practice of making a few extra pounds 
of butter each week for the local trade. Very often they buy 
and sell grain, hay, and foodstuffs among themselves, and even 
make barter exchanges. Likewise people in the towns and 
smaller cities have business relations differing somewhat from 
ordinary retailing. They exchange labor and even commodities. 
If we could include retailing under the head of local trade, it 
would, of its very nature, be the most important of all trade, 
since all goods except those exchanged directly are finally re- 
tailed. 

Inter-regional trade. — In a large country like the United 
States the value and importance of the trade and commerce 
among the various sections are very great. Each section 
specializes in a few products, thus creating surpluses which 
find their way into every other section. The best evidence of 
this movement is the enormous freight traffic of our railroads. 
Wherever we go we see trainload after trainload of goods 
moving in all directions : food eastward, manufactured goods 
westward, wheat southward, cotton northward. A hasty 

241 



242 



ELEMENTARY ECONOMICS 



Foreign Trade of the United States 
(In Hundreds of Millions of Dollars) . 





1860 
1865 
1870 
1875 
1880 
1885 
1890 
1895 
1900 
1905 
1910 

1915 

1916 
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DOMESTIC AND FOREIGN COMMERCE 243 

examination of the food and furnishings even of a modest 
home will show the significance of our inter-regional trade. 
Four everyday articles of food — sugar, salt, flour, and fruit — ■ 
may represent four widely separated regions of the country. 
Yet because they are so common we are likely to underestimate 
the complexity of an industrial organization that places them 
on our breakfast table every morning, and to overlook the 
methods by which every producer is paid for his product. 

Foreign trade. — Foreign trade is essentially no different 
from domestic trade. It rests on differences in climate, soil, 
capabilities of workers, and standards of living — that is, on 
territorial division of labor. Much of the domestic trade of our 
country resembles foreign trade in Europe, for the area east of 
the Mississippi River is approximately as large as all western 
Europe. Thus trade between New York and Florida is much 
like the trade between England and Spain. Mere distance, 
then, is not an important characteristic of foreign trade. As 
we shall see a little later, the chief difference between domestic 
and foreign trade is that the latter is always more or less hindered 
by national boundary lines, and by differences in languages, in 
customs, and in money units. 

Our chief interest at this point is not in the trade itself, 
but rather in the methods of settling accounts among individuals, 
among sections, and among nations. The getting of goods from 
the producer to the consumer is a matter of production ; the 
mechanism employed to make payments by the consumer to 
the producer is one of exchange. 

56. Paying Teade Debts 

Payments in money. — Obviously the simplest method to be 
employed in paying trade debts is for the debtor to discharge 
his obligation with money. If, as is often the case, the debtor 
should hold obligations against his creditor, he can discharge 



244 ELEMENTARY ECONOMICS 

his debt by paying the balarice in money. It is a common 
practice in many rural sections for a farmer to buy his suppHes 
on credit, selhng his surplus products at harvest time to the 
merchant from whom he had purchased supplies. The two 
accounts are compared at regular intervals and the balance. paid 
in money. 

Payments in bank checks. — A more common practice, in 
most urban communities at least, is for debtors to discharge 
their obligations with bank checks. In that case the local 
bank, supposing for simplicity there is but one, becomes a 
clearing house for the settlement of local accounts. As the 
checks come in, the bank's bookkeeper merely credits the 
amounts of the checks to the accounts of those who present them 
and charges the same amounts to the accounts of those who 
drew them. It often happens that during the same day the 
maker of a check will deposit, for credit, checks of other persons 
which have been paid to him by his debtors. We might extend 
this illustration until it should become extremely complex. 
Yet two facts essential to a proper understanding of paying 
trade debts would remain unaltered. (1) Many obligations 
are discharged in modern industrial society without the direct 
payment of money. (2) Ultimate trade balances must always 
be paid in money. 

Open accounts and trade acceptances. — Inter-regional trade 
debts are usually handled in a somewhat different manner. 
Sellers of goods (goods, wares, merchandise, or agricultural 
products, including live stock), such as manufacturers and 
jobbers, may have their accounts paid in one of three ways. 
They may, as has been the general practice in the United 
States since the Civil War, simply sell to their customers on 
open account, depending on each customer to discharge his 
obligation at the expiration of some specified period, as thirty, 
sixty, or ninety days. Under such circumstances the only 



DOMESTIC AND FOREIGN COMMERCE 245 

evidences of indebtedness in the possession of the seller are the 
entries on his books, the correctness of which, if dispute should 
arise, it may be difficult to prove. The Federal Reserve 
banking system, however, provides for trade acceptances, 
which differ from open accounts. In addition to charging 
the buyer with the amount of his bill, the seller sends him a 
trade acceptance bearing certain specified promises previously 
agreed on, which the buyer formally accepts by signing it. The 
acceptance now possesses all the characteristics of a promissory 
note, which the holder (seller) may discount at his bank or at 
the Federal Reserve Bank. Trade acceptances are recognized 
by business men as being superior to open accounts. They 
relieve sellers from the necessity of carrying undue risk, in- 
crease the borrowing power of creditors, make commercial 
accounts more liquid, and compel buyers to meet their obligations 
at maturity. 

Domestic bills of exchange. — Some sellers resort to a third 
method to collect from their debtors — a domestic bill of ex- 
change. Let us suppose that a corn-buyer in Iowa has an 
order for a carload of corn from a cattle-feeder in Pennsylvania. 
As soon as he has loaded the car he gets from the railroad com- 
pany a bill of lading which specifies among other things the 
amount of corn in the car, the name of the consignor (shipper) 
and the name of the consignee . He then draws a draft (domestic 
bill of exchange) on the ^ consignee in which he orders him to 
pay at sight or at the end of some stipulated period, such as 
sixty days, the purchase price of the corn. Now the shipper is 
ready to visit his banker. He presents the draft and the bill of 
lading to the bank, which credits his account with the amount 
named in the draft. There are now three parties known in 
the transaction, the drawer (shipper of the corn), the drawee 
(buyer of the corn), and the payee (banker). The Iowa bank 
now sends the draft with attached bill of lading to some bank 



246 ELEMENTARY ECONOMICS 

in the neighborhood of the drawee. This bank presents the 
draft to the drawee, who either pays the amount named in it, 
if it is a sight draft, or if it is a time draft, he accepts it by 

Domestic Bill of Exchange. 



^ ^^^ Yy Jz^Ay J/^;/p. Q/r//^./^/ 



^^y 3Y ul/^^TA^JAu^y. <?Jt7y. ( Idrawer or maker] 



writing across its face the word accepted. In any case the rail- 
road bill of lading is turned over to him, for without it he cannot 
get possession of his carload of corn. 

It is conceivable that a Pennsylvania manufacturer, a 
neighbor of the buyer of the corn, should sell several machines 
to a hardware merchant in the Iowa town where the shipper of 
the corn lives, and that he too should draw a draft on the mer- 
chant for the amount of his bill. If the two amounts were 
exactly the same and the same two banks handled both trans- 
actions, the two debts would be canceled without shipping 
money in either direction. If the amounts were not the same 
the difference between them would have to be settled in some 
other manner. 

These various movements can be easily seen by examining the 
illustration (Fig. 8, page 247). Provided the two amounts of 
money involved were the same, the Iowa bank merely pays to 



DOMESTIC AND FOREIGN COMMERCE 



247 



the corn-shipper what it collects from the hardware merchant, 
while the Pennsylvania bank pays to the manufacturer what it 
collects from the buyer of corn. In both cases the banks charge, 
in addition to a nominal fee, interest for the use of their money. 





Credit from Pennsylvania Bank 



Draft of Corn Shipper 



-< F=r 



Draft of Manufacturer 



Credit from Iowa Bank 



->- 




/ k Money 
Draft 



Machinery 




Fig. 3. 

Foreign bills of exchange. — Generally speaking, foreign 
bills of exchange resemble domestic bills of exchange. Foreign 
bills, however, have two features which domestic bills do not 
have. First, there is the necessity of converting one standard 
of money into terms of another standard — that is, a bill 
drawn in dollars payable in London, for example, must have its 
amount changed to pounds sterHng. Second, the length of 
time required and the expense involved in shipping gold from 
one country to another are usually greater than would be the 
case within a country. 

57. The Balance of Trade 

Par of exchange and the gold points. — To simplify matters 
let us confine our attention in this discussion to trade between 
the United States and England. Let us also assume that all 



248 ELEMENTARY ECONOMICS 

sales are made with the agreement that debts are to be paid 
in London in sterUng exchange. 

It is first necessary to determine the yar of exchange between 
these two countries. This, however, is a simple matter. It 
is done by dividing the weight of the fine gold in a dollar into 
the weight of the fine gold contained in an English pound. 
The result of the division is 4.866. Translated into terms of 
dollars the par of exchange is $4,866. 

A second preliminary notion is the gold points, called by 
some authorities the gold exporting points. Under normal 
conditions the expense involved — interest, insurance, and 
freight charges — in shipping S4,866 in gold from the United 
States to England is about two cents. Consequently, we say 
that the upper gold limit is $4,886 and the lower limit, $4,846. 
This two-cent margin above and below par is much less than 
it was a century ago ; and we may expect it to decline still- 
more in the future with a decline in the risks involved in trans- 
portation, with quicker transportation, and with a reduction 
in the normal interest rate. 

Fluctuations in the rate of exchange. — We are now pre- 
pared to examine the causes for fluctuations in the rates of 
exchange. Let us suppose that New York importers desire to 
buy a million dollars worth of sterling exchange with which to 
discharge their debts in England. Let us suppose also that 
exporters have sold to English merchants nine hundred thou- 
sand dollars worth of goods payable in London. Let us suppose 
further that there are no banks. The importers will seek for 
men who have debts owing to them in London, while the ex- 
porters will be on the lookout for men who are under obligation 
to pay debts in London. The former desire to buy credit, the 
latter to sell credit. Obviously, the importers could ship money 
to England with which to pay their debts, and the exporters 
could have the money owing to them in London shipped to 



DOMESTIC AND FOREIGN COMMERCE 249 

New York. In either case there is an expense of two cents 
per sterling pound — that is, the highest price importers will 
pay for the right to draw money in London is $4.886 ; the 
lowest price which exporters will accept for the right is $4,846. 
If we follow out our assumption we can conclude that the ex- 
porters sold all their rights to draw money in London at or 
near the upper gold point, while the balance owed by the im- 
porters, one Hundred thousand dollars, was shipped. 

Banks serve to facilitate matters. An exporter, like our Iowa 
corn-shipper, sells his foreign bill of exchange to his bank, 

Foreign Bill of Exchange. 



FIRST 

^ ^{WiJI^ J New rork,®^^^.m JeA / mL 

days after G>Zf^^^ of this FIRST of Exchange 
{Second Unpaid) pay to the order of 

Value received and charge the same to account of ^ 

LIVERPOOL IMPORTING COMPANY <^/T^.(p/0 <P^m7^Zf?y- 

Liverpool, England 



which sends it to its correspondent bank in London. The 
London bank presents it to the payer, and when the bill is 
paid, places the amount received to the credit of the New York 
bank from which it had received the bill. An importer, let us 
say, goes to the same New York bank and desires to buy sterling 
exchange. The bank, having credits in its correspondent bank 
in London, can accommodate him. What will it charge per 



250 ELEMENTARY ECONOMICS 

sterling pound? If it has relatively large balances in London, 
it is likely to charge the importer between $4,846 and $4,866. 
If its balances are relatively small, the price is likely to be 
between $4,866 and $4,886. The bank cannot afford to lose 
more than two cents on each pound sterling, for it could ship 
the gold from London to New York at that expense. Nor, for 
the same reason, would the importer pay more than $4,886. 
From the foregoing we see that the rate of exchange depends on 
the state of foreign trade. An excess of imports tends to cause 
the rates of that country to be above par ; while an excess of 
exports tends to force the rates below par. 

Other factors in the balance of trade. — Hitherto we have 
noticed only the importation and exportation of goods between 
the United States and England. We must now give attention 
to other factors that enter into determining the balance of 
trade. First, there is a steady stream of credit obligations, such 
as stocks and bonds, flowing between the two countries. An 
English investor, let us say, orders a New York broker to buy 
for him a number of Illinois Central railroad bonds. This 
transaction has the same immediate effect on the balance of 
trade as the same amount of exports from the United States 
to England would have had. Later, however, the effect on 
the balance of trade arising from imying interest on these bonds is 
the same as imports from England to the United States would 
have produced. This important fact is the. basis of a trade 
movement which many people fail to understand. Before the 
Great War the annual value of England's imports exceeded 
that of her exports by several hundred million dollars — that 
is, England had an unfavorable balance of trade. This balance 
she paid, in part, with the interest on the investments English- 
men had made in American industry. Three other less im- 
portant transactions act in a similar manner: the money 
English immigrants residing in this country remit to their folk 



DOMESTIC AND FOREIGN COMMERCE 251 

in England, the money American travelers spend in England, 
and the freight earned by English vessels carrying American 
goods, affect the balance of trade exactly like the payment 
of interest on English investments in this country. Hence a 
creditor people, such as were the English before the Great War, 
might easily go on forever with an unfavorable balance of trade. 
Conversely, a debtor people might also continue indefinitely to 
export more than they import, using the balance to pay travelers' 
cheques, immigrants' drafts, freights, and interest charges. 
The mere fact, therefore, that a country's trade for any period 
of time is highly favorable does not indicate, as many people 
believe, that that country is thereby increasing its gold supply 
by having the balance paid in that metal. Instead of gold it is 
more likely to be receiving canceled drafts, bond coupons, and 
freight receipts. 

We may now extend our illustration in which it was assumed 
that imports into the United States were valued at one million 
dollars and exports at nine hundred thousand dollars. Let us 
assume that during the same period English capitalists invested 
$100,000 in American bonds, that $5,000 were paid to English 
investors in the form of interest, that American travelers spent 
$20,000 in England, that English immigrants remitted $15,000 
to England, and that English merchantmen earned $25,000 in 
freights. Our accounts for the United States would then be : 

Cr. Dr. 

Exports $900,000 Imports $1,000,000 

Investments . . . 100,000 Interest , . . . . 5,000 

Balance due Travelers' cheques . 20,000 

English exporters . • 65,000 Immigrants' remittances 15,000 

Freight 25,000 

$1,065,000 $1,065,000 

Flow of gold and its effects on prices. — We may now turn 
to a consideration of the last step in settling the balance due 



252 ELEMENTARY ECONOMICS 

English exporters, which, according to the assumption above, is 
$65,000. Export bills of exchange are no longer to be had, since 
the total amount, S900,000, has already been absorbed by the 
importers, who originally owed $1,000,000 in England. A 
portion of the $100,000 investment, let us assume, has gone to 
pay interest and freight, and to cash travelers' cheques and 
immigrants' remittances. There remain then but $35,000 to 
be applied to pay on the balance of the debts of American im- 
porters, which, we have seen, was $100,000 ($1,000,000 — 
$900,000). Consequently, gold to the amount of $65,000 must 
be exported from the United States to England. This is the 
ultimate means employed in every case to pay balances of 
trade. 

The movement of gold to pay balances is self-regulating. 
Let us suppose that year after year it is necessary to ship gold 
to England to pay balances of trade. Gradually the supply 
of gold in that country would increase, while in the United 
States it would decline. According to the quantity theory of 
money, which is, that as the supply of gold increases its unit 
value decreases, prices in England would tend to rise while in 
the United States they would tend to fall. England would 
then be a poorer buying market and a better selling market 
than would be the United States. Consequently, the flow of 
gold from the United States to England would decrease while 
the flow in the opposite direction would increase, thus lessening, 
if not entirely destroying, the balance in favor of England. 
Because of this self-regulation, statesmen and bankers no 
longer, as they once did, look with great disfavor on a flow of 
gold from the country. They know that if it is needed here it 
will flow back in response to a lowering of prices. 



DOMESTIC AND FOREIGN COMMERCE 253 

EXERCISES AND PROBLEMS 



1.. Why do individuals exchange goods? 

2. What is the essential difference between domestic trade and 
foreign trade? 

3. What is the basis of foreign trade? 

4. What is a "bill of exchange"? 

5. What is a "bill of lading"? 

6. Define "par of exchange." 

7. How is it determined between any two countries? 

8. What persons deal in foreign exchange ? 

9. What are "gold points"? 

10. How are these points determined? 

11. What cause the rates of exchange to fluctuate? 

12. How are these rates restricted by the gold points? 

13. Explain "favorable balance of trade" ; "unfavorable balance of 
trade." 

14. Is an unfavorable balance of trade necessarily disadvantageous 
to a country? Why, or why not? 

15. How may a country maintain indefinitely an unfavorable 
balance of trade? 

16. How does a country that has no gold mines get its supply of 
gold coins? 

B 

1. Examine the articles in your oWn home or in the schoolroom 
and try to determine which of them were produced : 

a. In your own community. 
h. In your own state. 

c. In the United States. 

d. In other American countries. 

2. Secure a domestic bill of exchange from some bank. 

a. Fill it out as if you had sold a carload of corn to James White, 

payable in sixty days. 
h. What would be the next step in the transaction? 

c. How will the bill look after its acceptance by White? 

d. Who is likely to hold the bill until it matures ? 

e. How does the accepted bill differ from a promissory note ? 



254 ELEMENTARY ECONOMICS 

3. The French monetary unit is the gold franc, containing 4.48 
grains of fine gold. 

a. How many francs can be coined out of a United States gold 

dollar ? 

b. This number represents the "French par of exchange." 

c. Estimate the gold points. 

4. Make a list of transactions coming under your own observation, 
which would affect the rates of exchange between your community and 
New York City ; the rate of foreign exchange between New York and 
South America. 

C 

1. How could each of the following affect the rate of exchange 
between the United States and England: 

a. Failure of the wheat crop in the United States ? 

b. The building of an American merchant marine ? 

c. The purchase of London city bonds by New York bankers? 

d. The return of British immigrants to the mother country? 

e. The decline of gold production in the United States? in South 

Africa ? 

2. How would the gold points on sterling exchange be affected by : 

a. Change in the interest rates from 5 to 4 per cent? 

b. Improvement in shipbuilding? 

c. Establishing aeroplane traffic between the United States and 

England? 

3. Suppose the imports from England exceed our exports to that 
country. How is this trade condition likely to affect : 

a. The rate of sterling exchange in New York? 
6. Prices in the United States? in England? 

c. Probable future trade movements ? 

d. Profits of exporters? of importers? 

4. It has been proposed that the nations of the world should adopt 
a uniform currency. How would such a proposal, if carried out, affect : 

a. Par of exchange ? 

b. Rates of exchange? 

c. Gold points? 

d. International trade? 

e. Domestic trade ? 
/. Gold mining? 

g. Issue of paper money? 



DOMESTIC AND FOREIGN COMMERCE 255 

SUPPLEMENTARY READING 

Bullock, Introduction to the Study of Economics, 3d ed., pages 373-410. 

Ely, Outlines of Economics, 3d ed., pages 345-367. 

Fetter, Economics, Vol. II, pages 185-198. 

Johnson, Introduction to Economics, pages 324-347. 

Seager, Principles of Economics, pages 365-382. 

Seligman, Principles of Economics, 5th ed., pages 587-612. 

Taussig, Principles of Economics, 2d ed., Vol. I, pages 480-507. 



. CHAPTER XIX 
THE TARIFF IN THE UNITED STATES 

58. Historical Sketch 

Advances to a protective rate. — The first forty years' 
experience of the United States in tariff legislation resulted 
in a movement from moderately low rates to rates too high to 
be endured by certain sections of the country. The first tariff 
act, which was passed in 1789, was intended by Congress pri- 
marily as a revenue measure, though it did give, as its preamble 
states, a degree of protection to a few industries. During the 
next twenty-five years, tariff legislation received little attention 
at the hands of the lawmakers : in 1804 an increase of five per 
cent was made for raising funds for the Barbary War, and in 
1812, in order to raise revenue for carrying on war, the rates 
were doubled. 

The first real demand for a protective tariff came at the 
close of the War of 1812, when American manufacturers found 
the home trade which they had built up during the war seriously 
threatened by English exporters who were flooding the American 
markets with English-made goods. Congress and President 
Madison, realizing the justice of the demand, agreed to a new 
tariff law which should give special protection to woolen and 
cotton goods by imposing various rates, some as high as twenty- 
five per cent, on all such goods imported into the United States. 
During the next few years, however, the opinion grew rapidly 
in the South that the rates of 1816 were harmful to the interests 
of that section. Portions of New England, too, favored lower 

256 



THE TARIFF IN THE UNITED STATES 257 

duties. This was tlie feeling when Congress took up the 
tariff question in 1824. Representatives f"™ "f* 
states from Kentucky, and from portions of New England 
supp ted protection. The opposition leaders came from he 
South and from New England. After protracted debate he 
friends of protection, led by Henry Clay, secured a contmuation 
of the rates on woolen and cott«n cloth ; also mcreases m rates 
on other goods, notably iron. 

The next seven years saw the Union almost broken asunder 
over the question of protection. The manufacturers, dis- 
satisfied with the legislation of 1824, set up an agitation for 
hi^ei tanif rates, ly this time the South was d-gusted^^^^ 
what its leading men said was the " greediness of the Noith^ 
But the question would not be quiet. Accordingly m 1828 
Congress once again took the matter under advisement. The 
debate that followed showed the South arrayed agamst the 
North, with the West divided. John C. Calhoun of South 
Carohm and other Southern members of Congress left nothing 
undone to convince their colleagues that an mcrease m tariff 
Ttes would be not only an injustice to the South, but also a 
means of destroying the bonds that held the Umon together 
But their efforts were in vain. Congress enacted the Tantt 
of Abominations" law, which bore the highest rates of any 
tariff prior to the Civil War; and which, strange to say, satis- 
fied nobody, not even protected manufacturers, smce they now 
found it necessary to pay tariff duties on many of the raw 
materials which they were compelled to use m their business^ 
The South was in a ferment over the tariff question. South 
Carohna took advanced ground by threatening to oppose 
within her boundaries the enforcement of the tariff law. Fear- 
ful of the outcome of such an action. Congress m 1832 modihed 
somewhat the law of 1828, but not enough to satisfy South 
Carolina. 



258 ELEMENTARY ECONOMICS 

Decline of the tariff rate. — The situation now grew worse 
instead of better. South Carohna declared the tariff law of 
1832 to be null in so far as its operation in that state was con- 
cerned. President Jackson, who was determined to enforce 
the law as long as it remained on the statute books, secured 
from Congress authority to compel the obedience of the nullify- 
ing state. Both sides prepared for the struggle, which seemed 
inevitable. Just then Clay, whom everybody regarded as the 
" father " of the protective principle, came forward with a com- 
promise measure in which he sacrificed temporarily for the sake 
of peace the essential features of protection. The result was the 
Compromise Tariff of 1833, which provided that all the rates in 
the Act of 1832 above 20 per cent should be gradually reduced 
to that level, the final reduction to be made on July 1, 1842. 

Consequently, there was no general tariff legislation during 
the next eight years. In 1841, however, the Whigs came into 
power pledged to raise the tariff rates as soon as the compromise 
had run its course. Accordingly, with the guidance of Clay, a 
Whig Congress passed a protectionist measure, which President 
Tyler forthwith vetoed. Later (1842) he agreed to a bill 
similar in character, which is known in the history of the United 
States as the Whig Tariff of 1842. Three years later the 
Democrats, on return to power, set about to revise the tariff 
rates downward. Careful investigations of business conditions 
were made by Robert J. Walker, secretary of the treasury. 
With the information secured by Secretary Walker as a basis, 
Congress enacted the Walker Tariff Act of 1846. This act was 
free trade in character ; it arranged the articles taxed under 
schedules designated as A, B, C, and so on ; and it carried a 
large free list — that is, imports not taxed. With slight modifi- 
cations this act continued in force until 1861, when it was super- 
seded by the Morrill Act, which bore higher rates made neces- 
sary by a treasury deficit. 



THE TARIFF IN THE UNITED STATES 259 

The war tariffs. — The heavy expenses of the Civil War 
prompted Congress in 1862 and again in 1864 to raise tariff rates 
to a point higher than they had ever been before. Compared 
with the Morrill Tariff, the war tariffs increased, among others, 
rates on pig iron and iron rods fifty per cent, on silks sixty per 
cent, on raw wool one hundred per cent, and on. certain woolen 
goods one hundred per cent. Soon after the close of the war,' 
the opponents of protection urged on Congress the necessity 
of making material reductions in the war-tariff rates. Their 
success was slight, for a majority of the people believed in the 
merits of protection. Finally in 1887 President Cleveland de- 
voted his entire annual message to the necessity of lowering 
tariff duties. This was the signal for a congressional battle. 
The Republican members stood solidly for protection ; the 
Democratic members, for a tariff for revenue only. The de- 
bate that followed (in 1888) was a battle of giants. No direct 
legislation resulted, though it served, as nothing else could 
have done, to bring the subject of protection into the political 
foreground. 

A period of high tariff rates. — Two years later (1890) 
the Republicans, being in power both in Congress and in the 
White House, enacted the McKinley Tariff Law, which placed 
the rates on many imports even higher than the war tariffs had 
done. Apparently the people were not prepared for such a 
radical measure. The election of 1890 gave the Democrats 
control of the lower house of Congress, Mr. McKinley even 
failing of election in a district supposed to be protectionist. 
Two years later (1892) the Democrats captured the presidency 
as well as Congress. They then set about to enact a tariff law 
along the lines they had been advocating for a half century. 
The result was the Wilson Tariff Act, which in many respects 
resembled the old ''Abominations" act of 1828. It pleased 
nobody, for it was merely a bundle of inconsistencies, made so 



260 ELEMENTARY ECONOMICS 

by the desire of many members of Congress to secure protection 
for the goods produced in their respective districts and free 
trade for the goods consumed there. Even President Cleveland 
refused to sign the bill, permitting it to become a law without 
his signature. 

Circumstances combined to make the Wilson Tariff unpopular. 
The people believed that it was largely responsible for the Panic 
of 1893, and two years later they elected Mr. McKinley and a 
Republican Congress pledged to revise the tariff rates upward. 
Accordingly in 1897 the Dingley Tariff Law was enacted with 
even higher rates than those in the McKinley Act. The pros- 
perity that followed, a majority of the people attributed for a 
time to the Dingley Act. By 1908, however, the rank and file 
of the protectionists had misgivings as to the influence of such 
high rates on industry. They began to suspect that the tariff 
was largely responsible for the high prices, which were coming 
to be burdensome. Sensing this feeling, the Republican plat- 
form of that year declared for a revision of tariff rates. Being 
successful they set about to carry out their promises. The 
result was the Payne-Aldrich Tariff Law of 1909, which, while 
it reduced many rates, did not prove satisfactory to those who 
had a sincere desire to see the tariff materially modified. 

A return to lower rates. — The Payne-Aldrich Law served 
to widen a split which was already making itself felt in the 
Republican party. The more progressive leaders of the party 
felt that it was not living up to its best traditions as a friend 
of the masses. Gradually the breach widened, until those who 
desired to work reform within the party came to be known as 
insurgents. By the spring of 1912 the feeling had become bitter. 
President Taft was supported for reelection by the con- 
servatives of the party, while the more liberal elements favored 
ex-President Roosevelt. Both men were finally nominated, 
one by the Republicans, the other by the Progressives. Divi- 



THE TARIFF IN THE UNITED STATES 261 

sion meant defeat. The Democrats elected Woodrow Wilson, 
their candidate for president, and likewise a Democratic 
Congress. 

Once again in control of the government, the Democrats 
began to lay plans to revise the tariff. Congress spent months 
in examining witnesses, and in discussing the advantages and 
disadvantages of each rate. Finally in 1914 the Underwood- 
Simmons Tariff Law was sent to the president for his signature. 
This act, as might be expected, lowered many rates, and en- 
larged the free list. To offset any decrease in revenue that 
might arise from these changes, an income tax, conformable to a 
recently ratified amendment to the Constitution, was imposed. 

Basis of tariff legislation. — Practically every one of our 
tariff laws has been the result of compromise. Protection 
cannot escape being sectional, or even local, in any country ; 
and in a government like ours, where each lawmaker represents 
the interests of a single district, localism is an exceedingly strong 
force. Each lawmaker very naturally feels the necessity of 
conserving the interests of his own constituents. Accordingly, 
he is strongly tempted to vote for an entire tariff law which 
favors his district, even though he be decidedly opposed to 
nine-tenths of its provisions. The legislative history of any 
important tariff law bears out this statement. It has fre- 
quently occurred that a bill passing one House has been sub- 
jected to hundreds of amendments in the other. 

It is but fair to say that Congress has made some attempts 
to get at all the facts in the case of protection. In 1882 that 
body provided for a Tariff Commission and granted it power to 
examine witnesses for and against the protective policy. The 
people placed little confidence in the good intentions of the 
Commission, since, unfortunately, its chairman happened to be 
interested in the wool industry. Again, in 1909 a second com- 
mission, called a Tariff Board, was authorized. This Board 



262 ELEMENTARY ECONOMICS 

survived but a few years. In 1914 Congress provided for a 
third commission, which, on account of the high personnel of its 
membership, is Ukely to have the moral support of the people. 
It must be kept in mind, however, since Congress cannot 
delegate its legislative powers, that the best any tariff board 
or commission can hope to do is to arrive at some definite con- 
clusion fortified by unanswerable facts that will appeal to the 
good sense of Congress and the people. 

59. Basis of Free Trade 

Advantages of territorial division of labor. — The chief 
argument for free trade — and some are bold enough to insist 
that it is the only one needed to prove the case — is based on the 
advantages arising from territorial division of labor. We have 
seen how industry naturally adapts itself to locality : cotton- 
growing to the Southern states, wheat-growing to the upper 
Mississippi Valley, and iron-smelting to Pennsylvania. We 
have seen also how, as a result of this adaptability, the world's 
supply of goods is greatly increased over what it would be if each 
locality or section were self-sufficing. With this fact established, 
the advocate of free trade raises the question : What possible 
benefit to the society of such a country as ours can come from 
setting up artificial barriers that prevent consumers from getting 
their goods where they can be most advantageously produced? 
They ask just how much better off industrially would New Eng- 
land be at the present time if every pound of cotton which has 
gone into that section had paid an import tax. The most 
enthusiastic supporter of protection realizes the advantages 
gained from interregional trade within the United States. He 
knows that one of the sources of wealth of Pennsylvania is the 
rich grainfields of Iowa and Illinois ; and that a tariff wall 
that would compel each bushel of wheat or corn to pay an 
import tax would work a positive hardship on the consumers of 



THE TARIFF IN THE UNITED STATES 263 

Pennsylvania without benefiting the producers of Iowa or 
Ilhnois. The free trader at this point extends his argument 
by insisting, for example, that the people of the United States, 
wheat farmers included, would profit in the long run if they 
could secure wheat from Argentina cheaper than they could 
produce it at home. ' 

No buying without selling. — The free trade advocate next 
takes safe ground by declaring that there can be no buying 
without selling — that is, no importing without exporting. 
He points out that our purchases abroad in cheap markets must 
be paid for in goods of our own production ; and that the cheaper 
they are the less of our goods it will be necessary to send abroad 
to exchange for them. Finally, by selecting an extreme illustra- 
tion, he shows the absurdity of the protectionist doctrine of self- 
sufficiency. He asks if it would be profitable to grow bananas 
in Maine, corn in Rhode Island, cotton in New York, or sugar 
cane in Pennsylvania. Of course the answer is " No." He then 
completes the argument, as far as he is concerned, by asking why 
the natural adaptability of industry should be hindered at all. 

60. Economic Arguments for Protection 
The infant-industry argument. — The soundest argument 
for protection is known as the infant-industry argument, which 
means simply that a society is justified in burdening itself to 
protect new industries temporarily against the competition of 
similar foreign industries, already full-grown and strong. 
Alexander Hamilton clearly saw this need and urged on Congress 
in his Report on Manufactures (1791) the necessity of en- 
couraging those struggling industries which gave- promise of 
future development. The practical difficulty which the carry- 
ing out of this pohcy has met has been the disinclination on the 
part of the protected infant to see when he has really reached his 
manhood stage. 



264 ELEMENTARY ECONOMICS 

The home-market argument. — Second in point of time is 
the home-market argument, which Hamilton outUned in his 
Report on Manufactures, and which* Henry Clay enlarged and 
extended during the tariff debate of 1824. The essence of this 
argument is that a very large country, like the United States, 
should artificially encourage one industry in order to provide a 
market for the products of another. Clay contended that the 
United States could amply afford t© burden itself with the 
relatively high prices of New England manufactures, if by so 
doing a market was provided in New England for the grain of 
the Mississippi Valley and the cotton of the lower South. 

The wages argument. — The most potent argument for pro- 
tection at the present time is the wages argument, which 
assumes that protection causes higher wages than would other- 
wise be the case. Its exponents hold that protection accounts 
for American workers getting higher wages than foreign workers 
engaged in the same trade or industry. They usually fail, 
however, to explain by similar reasoning why wages are higher 
in free-trade England than in protected Germany. It must be 
remembered too that at no time under the highest tariff rates 
was more than one-tenth of the workers of the country engaged 
in protected industries. 

61. Protection and Nationalism 

The spirit of nationalism. — Protection is essentially nation- 
alistic. Its ideal is a nation industrially strong and self-suffi- 
cient to a high degree. Any force that increases the spirit of 
nationalism increases also the desire for additional industrial 
strength. Illustrations from the history of our country are 
illuminating. Every foreign war, except the one with Mexico, 
has been the direct cause of an increase in tariff rates or of a 
maintenance of rates already high. The cause is not far to se^k. 
War necessarily increases the dependence of a country on its own 



THE TARIFF IN THE UNITED STATES 265 

industries. Besides, it knits the various sections into a closer 
union. Hence, there arises a general desire not only to main- 
tain the increased self-sufficiency reached during the stress of 
war, but also to protect those industries which the war itself has 
brought into being. 

Military self-sufficiency. — Many of the most ardent friends 
of protection agree that it has little economic justification, and 
that it imposes a heavy financial burden on any society which 
adopts its principles and practices. They insist, however, and 
with justice, that the financial cost of protection does not 
differ in principle from the cost of a battleship. Each in its 
own way, they say, plays an important role in defending the 
country from her enemies. The Great War brought the truth of 
this argument home to the whole world. The interruption of 
our trade with the Central Powers threatened for a time to 
cripple some of the important industries that depended on Ger- 
man products, such as chemicals and dyes. Fortunately, after 
expensive experiments and long delays, we succeeded in making 
good our loss in these lines. But it is doubtful if, in the long 
run, we gained by not having previously encouraged these same 
manufactures by protecting them against German competition. 
As one writer has put it : What does it profit a poorly clad and 
poorly equipped soldier to know that for generations his an- 
cestors have gained financially by purchasing their woolen 
cloth and equipment from the present enemy simply because 
they could not make them so cheaply at home ? 

EXERCISES AND PROBLEMS 
A 

1. What is the difference between a protective tariff and a tariff 
for revenue only ? 

2. Why were the first tariffs not protective ? 

3. Why was the South generally opposed to protection? 



266 ELEMENTARY ECONOMICS 

4. Why was New England divided over the tariff about 1820? 

5. Why was the tariff of 1828 called the "tariff of abominations"? 

6. Why are schedules used in tariff acts? 

7. Why were tariff rates not lowered at the close of the Civil 
War? 

8. Account for the various changes in the tariff between 1890 and 
1909. 

9. Why is the tariff likely to be a local issue ? 

10. What benefits could possibly accrue to the people of Iowa by 
placing, if it were constitutional, a tariff duty on Pennsylvania iron? 
on Massachusetts cotton goods ? 

11. Why can there be no buying abroad without selling abroad? 

12. What is the essence of the "infant industry" principle? 

13. How has this principle been abused? 

14. What is the relation of protection and nationalism? 

B 

1. Make a list of goods you know to be of foreign manufacture. 

a. Which foreign countries are represented in the list? 

b. What is the nature of the articles in the list ? 

i. Are they heavy? 
ii. What raw materials have gone into their manufacture? 

c. Why have they been imported and not made in this country? 

2. Call to mind the most successful physician in your community. 

a. Suppose that he is also a mechanical genius, 
i. Does he keep his own car in repair? 

ii. Does he repair his surgical instruments? 

b. Suppose that he is also the strongest man physically in the 

community, 
i. Does he make it a practice to mow his own lawn? 
ii. Does he help store the coal in his basement? 

c. Suppose that he is also the most expert typist and office 

worker in the community, 
i. Does he do his own typing? 
ii. Does he keep his own books and answer his telephone? 

d. Correct answers to these and similar questions which any one 

of us can raise, will aid in clearing our notions of protection. 

3. Inquire among the business men of your community as to the 
attitude of each toward a protective tariff. 



THE TARIFF IN THE UNITED STATES 267 

a. Which hold to views held by their fathers? 

h. Which are interested in a business way in the tariff ? 

c. Which believe strongly in nationalism? in internationalism? 

d. How many have changed their views on protection since they 

first began to give the question serious thought ? 

e. Learn why these views have been changed. 

/. Would you say, after making this inquiry, that the average 
business man thinks seriously on protection and its effects ? 
4. Explain why your own community or congressional district is 
protectionist or free trade. 

C 

1. During the first half-century of our history many individuals 
and several sections of the country changed their opinions radically 
regarding the merits of protection. 

a. Why did the South at first favor protection? 
h. Account for Clay's zeal in supporting protection. 

c. Why was New England divided over the question? 

d. Would you expect any changes of opinion to have occurred in 

New York, Ohio, or Indiana? Explain. 

2. At one time the friends of protection argued that the high wages 
of American workmen made high tariff rates necessary to protect the 
American manufactures that gave these workmen employment. Now 
the argument is that the tariff itself makes the wages of American work- 
men high. 

a. Examine each argument. 

h. Is either sound? Explain. 

c. Are they inconsistent? Why, or why not? 

d. What, in your opinion, is the relation of protection and 

wages ? 

3. Examine the statement that "the tariff is a local issue." 

a. Which sections of the country invariably support or oppose 

protection ? 

b. Can you think of any inducement that might cause free-trade 

senators to vote for protection? Explain. 

c. How would you expect your congressman to vote on pro- 

tection? Why? 

d. Which is likely to be the stronger force, his own judgment or 

the interests of his district? 



268 ELEMENTARY ECONOMICS 

4. "Every purchase of foreign-made goods diminishes the demand 
for American labor." 

a. What is the basis of this statement? 

6. What, in the long run, is used to pay for foreign-made goods? 

c. Formulate your own opinion as to its correctness. 

5. What lessons on protection did the Great War teach the United 
States. 

SUPPLEMENTARY READING 

Bullock, Introduction to the Study of Economics, 3d ed., pages 387—410. 

Ely, Principles of Economics, 3d ed., pages 368-383. 

Fetter, Economics, Vol. II, pages 199-240. 

Fisher, Elementary Principles of Economics, pages 194, 195, 207, 208, 

337, 453, 454. 
Johnson, Introduction to Economics, pages 350-373. 
Seager, Principles of Economics, pages 383-398. 
Seligman, Principles of Economics, 5th ed., pages 597-612. 
Taussig, Principles of Economics, 2d ed.. Vol. I, pages 508-546. 



CHAPTER XX 
FLUCTUATIONS OF THE PRICE LEVEL 

62. Effects of Fluctuating Prices 

Fluctuations in the value of money. — The general notion is 
that money, especially gold, possesses a constant value. Yet 
any one who has had experience in making purchases over a 
period of time, realizes that a gold dollar will, in general, buy less 
at one time than at another. His conclusion is likely to be, not 
that the value of the dollar has changed, but rather that prices 
of goods have changed. In general these two changes are but 
opposite aspects of the same economic phenomenon. A rise in 
prices means a fall in the value of money, while a fall in prices 
indicates that the purchasing power of the dollar has risen. If 
all exchanges were made by barter there could be no change in 
the general price level — that is, the value of all goods could not 
rise or fall. If some fell others would rise, while if some rose 
others would fall. To get a simple illustration, let us suppose 
that a bushel of wheat will exchange for two bushels of corn, or 
for ten pounds of meat or for twenty oranges ; and, further, 
that there are no other goods under consideration. Let us 
suppose 'further that a short wheat crop causes the value of 
wheat to rise until a bushel will exchange for three bushels of 
corn, or fifteen pounds of meat, or thirty oranges. Truly the 
value of wheat has risen, but what of the value of each of the 
other goods in respect to wheat or to each other? Clearly corn 
has fallen in value if we compare it with wheat ; it has not 
changed in value, if measured in terms of oranges. Thus, if corn 

269 



270 ELEMENTARY ECONOMICS 

Fluctuations in Price Level : 1890-1918. 





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FLUCTUATIONS OF THE PRICE LEVEL 271 

were the medium of exchange we would say that wheat has risen 
in price and that the price of meat and oranges has remained 
the same. If, on the other hand, wheat were the medium of 
exchange, the fact that a unit of wheat exchanges for more corn, 
meat, or oranges would indicate a general fall in price level. 
Since money is the medium by which all other values are meas- 
ured, its value rises and falls inversely with the rise and fall 
of the price level. 

Effects on individuals. — Appreciable variations in price 
level are soon noticed by individuals, in a variety of ways, 
especially by those whose incomes are constant. A rise in 
prices has exactly the same effect as a decrease in income, and 
conversely a fall of the price level is actually an increase of the 
income. There is, to be sure, in most cases a tendency for the 
income to follow price level ; yet salaries and wages almost 
always lag behind a rise in prices, while they respond more 
quickly to a fall. Price fluctuations are largely responsible for 
social unrest. When one has adjusted his income to his expendi- 
tures, any change, especially an upward tendency in prices, is 
not welcome. The most striking effect is felt by those who 
depend entirely on funded incomes. Thus, a widow receiving a 
life insurance annuity of $600 a year is bound to feel the pinch 
of an increase in the price level. She finds it necessary to curtail 
portions of her accustomed expenditures. Her command over 
goods in 1918, for example, was scarcely more than half as 
great as it had been twenty years before. In reality, then, her 
income had shrunk from $600 to $300. 

Effects on the government. — A rise in prices quickly affects 
governments — national, state, city. All of the states, for 
example, expend large sums annually on charitable institutions, 
the amount of which is usually determined at stated intervals. 
If after the size of an appropriation is fixed, the prices of food- 
stuffs, or fuel, or clothing rise, the appropriation is bound to 



272 ELEMENTARY ECONOMICS 

prove inadequate to meet the needs for which it was made. 
Salaries, too, must be adjusted to meet the increased cost of 
Uving. Even stationery, printing, and office supphes cost more 
than formerly. Here is a partial explanation for the rapid 
increase in taxation following the year of 1900. The effects of 
higher prices on government show themselves quickly under the 
stress of war. The national government borrows huge sums. 
Prices rise as a result of war demands. Usually, additional funds 
are necessary to cover unanticipated rises in prices. Thus the 
problems of war have added to them the problem of securing 
funds to cover inflated prices. 

63. Measurement of Price Fluctuations 

Payment of long-time debts. — In the preceding discussion 
we have confined our attention to short-time transactions in 
which the effects of price fluctuation may be difficult to see. 
Let us now turn, merely for illustrative purposes, to its effects 
on long-time transactions. Suppose one man loaned another 
in 1900 the sum of $1000 payable in eighteen years. When the 
loan was made, the $1000 possessed a certain purchasing power, 
which may be designated by 4 a;. Gradually,' as is well known, 
the general price level rose, until in 1918 it was about twice as 
high as it had been eighteen years previously. When the loan is 
repaid the lender finds that its purchasing power has been 
decreased by half, to 2 x. In other words, he cannot derive from 
it the same satisfaction which he could have derived when he 
loaned it. He finds that it requires more money to buy the 
same amounts of food, of clothing,* and of other goods. The 
significance of this loss of purchasing power appears strikingly 
in the case of a savings-bank deposit, which bears a low rate of 
interest. Let us assume that such a deposit was made in 1905, 
remaining ten years and earning three per cent interest com- 
pounded annually. One hundred dollars 'deposited under these 



FLUCTUATIONS OF THE PRICE LEVEL 273 

circumstances equaled $134.39 in 1915. Yet the rise in prices 
during that period more than offset the interest earnings. In 
short, the depositor, as far as the gratification of desires was 
concerned, was in a poorer situation when he withdrew his 
deposit than he had been when he made it. Depreciation in 
the value of money (rise of the price level) works a similar hard- 
ship on debtors. Thus, a dollar which is repaid after a period 
of falling prices has a much greater command over commodities 
than it had at the time the loan was made. 

Principle of index numbers. — For measuring these changes 
in general prices a convenient device known as index numbers is 
employed by the government and others. The prices for any 
year may be taken as a standard by which the prices of any other 
year may be measured. For purposes of illustration, we may 
take 1902 as the standard year and by it measure the price 
level of 1912, as follows : 

1902 1912 

$ 1.00 — 100% — Wheat (bu.) . . . $0.80— 80% 

15.00— 100% — Iron (ton) 18.00—120% 

0.12 — 100% — Cotton (lb.) .... 0.13 — 108% 

7.00— 100% — Cattle (ewt.) .... 6.00— 86% 

0.30 — 100% — Wool (lb.) ..... 0.40 — 133% 

6.00 — 100% — Hogs (cwt.) .... 6.00— 100% 



6)600% 6 )627% 

100% 105% 

Thus, by considering only the six commodities named, we find 
that the price level of 1912 is five per cent higher than it had 
been in 1902. It will be noticed, however, that during this 
period the price of hogs remained unchanged, and that the 
prices of wheat and cattle fell. If the consumption of an in- 
dividual were confined to these three commodities, he would, 
during the ten years under consideration, have enjoyed a falling 
price. Yet the typical consumer, since he is likely to purchase 
a great many different commodities, would have found at the 



274 ELEMENTARY ECONOMICS 

latter date that the purchasing power of his money had actually- 
declined, compared to its purchasing power in 1902. 

Applications to industry. — The principle of index numbers 
is applied in a variety of ways to the adjustment of industrial 
problems arising from price fluctuations, though it is not yet 
generally accepted by business men as a practical solution. The 
government from time to time publishes the fluctuations in 
prices as shown by ndex numbers, and very often, as in the 
case of fixing wages, employs it to adjust unfair conditions. It 
has been seriously proposed by some that the national govern- 
ment undertake, by changing the size of the gold dollar, to keep 
prices at exactly the same level. So far the proposal has 
appeared to officials and business men as impracticable, though 
none denies the need of some plan whereby incomes might be 
protected against price fluctuation. 

64. Price Level and Industry 

Different phases of industry. — The accepted explanations 
of what economists call cycles of business are too involved for 
detailed discussion at this point in our progress. We can, 
however, notice with profit the three phases through which 
industry seems to move in its never-ending journey. For the 
sake of convenience we shall begin our examination at the point 
where prices start to rise, giving attention first to the period of 
prosperity ; then to the period of malproduction, usually called 
overproduction ; and finally to the period of depression, which 
brings us back to the starting point. 

Period of prosperity. — Rising prices and industrial pros- 
perity are intimately related. Just as soon as prices begin to 
rise producers begin to enjoy increased profits, which in turn 
stimulate them to increase the volume of their output.. They 
buy more land, build additions to their plants, purchase newer 
and better equipment, and increase their laboring forces. They 



FLUCTUATIONS OF THE PRICE LEVEL 275 

reach out after new markets, either by increasing their sales 
force or by advertising more liberally. Prosperity is in the air. 
Every undertaking seems to succeed. Raw materials increase 
in value, permitting higher prices to be set on finished products 
even before they are ready for the markets. Jobbers and mer- 
chants reap additional profits which arise from the increases in 
value their goods have enjoyed while waiting to be sold. It is 
to be noticed that the enterpriser first of all feels the impulse 
coming from a rising price level. This impulse he transmits 
to others by competing sharply for raw materials, land, labor, 
and capital, which he must have in order to gain increased 
profits through an increase in production; also by increasing 
his own purchases for consumption. 

This whole movement is extremely complicated, yet we may 
assume a simple case for purposes of illustration. Five manu- 
facturers of a standard article enjoy, let us say, a monopoly of its 
production. Just as soon as the price level starts upward they 
begin to enjoy additional profits arising from the increased price 
which their products command. Each sees the desirability of 
increasing his own output. It is highly probable that up to this 
point their laborers have not enjoyed any of the income which 
the increased price produces ; and it is also possible that the 
producers of the raw materials which our five manufacturers con- 
sume are selling at the old price. The competition of the five, 
however, will in time raise wages, and increase the prices of raw 
materials. 

Malproduction and credit expansion. — The struggle for extra 
profits overreaches itself in due time. Producers overestimate 
the capacity of the market for consumption at a price that will 
return costs of production. Here is the key. to the mooted 
question: Is overproduction possible? The answer may be 
Yes or No. In either case an explanation is necessary. Over- 
production is possible, if, by overproduction, we mean that there 



276 ELEMENTARY ECONOMICS 

is a surplus of goods for which there is no demand at a price 
that will cover the expenses involved in producing them. It is 
not possible in the sense that there are more goods than society- 
can consume, for the social capacity for consumption is never 
satisfied. What actually happens is that too many goods of a 
particular kind are thrown on the market — that is, there is 
malprodudion. 

At the same time there is almost sure to have been an over- 
expansion of credit. Producers of all sorts have been carried 
away by the hope of anticipated profits, resulting in the creation 
not only of more goods than society demands, but also in the 
creation of excessive money obligations. Such a situation 
usually results in a crisis. Manufacturers curtail their opera- 
tions by lessening their purchases of raw materials, by dis- 
charging portions of their workmen, and by contracting their 
active capital. Producers of raw materials, laborers, and 
money-lenders must, as a result, curtail their expenditures for 
consumable goods. All is uncertainty. Business optimism has 
disappeared. The typical business man waits for others to take 
the lead. Prices are now on the decline. 

Period of falling prices. — After the first few months of the 
crisis, business begins to readjust itself on a new basis. Con- 
servatism becomes the watchword. Producers exercise great 
care in determining the markets. They give more attention to 
details, are less Hberal in paying wages, and drive sharp bar- 
gains for raw materials. If prices continue to fall for a time, 
as is usually the case, readjustments are constantly necessary. 
Obviously, there is a limit below which prices cannot fall. 
Hence the time must come when the trend will turn upward. 
This is hastened by the natural optimism of business men, by 
the infusion of new blood among the enterprisers, and by 
improvements in the industrial arts. Here, then, we are back 
again at the point where we started. 



FLUCTUATIONS OF THE PRICE LEVEL 277 

Experiences of the United States with panics. — It may 

happen, as our own experience shows, that the panic comes at 
the close of a fall in the price level rather than at its beginning. 
In 1873 we experienced one of the worst panics in our history. 
Yet from that time on for almost twenty-five years prices 
continued to fall, culminating in the panic of 1893. For three 
years following this latter panic prices kept on downward. 
Then they started upward until by 1914 they had reached such a 
height as to cause grave concern. Many far-sighted men pre- 
dicted a severe crisis. Just then the outbreak of the Great 
War created a heavy demand for all sorts of products. The 
supply of money increased. Manufacturers exerted themselves 
to reap war profits. Practically every one felt the prosperity 
that came from the war. The entry of the United States itself 
in the war, in April, 1917, gave a> still greater impetus to pro- 
duction. The heavy demands of the government, coupled with 
the withdrawal of milhons of men from industry, pushed prices 
still higher, which no doubt a return to normal conditions will 
lower. 

EXERCISES AND PROBLEMS 

A ■ 

1. Why cannot the value of all commodities, gold included, rise 
or fall at the same time? 

2. What is the relation between the price level and the value of an 
ounce of gold? 

3. How does a change in the price level affect individual incomes ? 
public incomes ? 

4. What is the relation of changing price level to social unrest ? 

5. Why is it desirable to measure fluctuations in price level? 

6. What is the principle underlying the use of index numbers ? 

7. How are index numbers applied to business affairs? 

8. Just how does the shifting of the price level affect industry? 

9. Why should a crisis usually be found associated with high prices ? 

10. What is meant by the expression "overproduction"? 

11. What has been the experience of the United States in panics? 



278 ELEMENTARY ECONOMICS 

B 

1. Call to mind some experiences of your own in which the price 
level has appeared to change. 

2. Learn from inquiry how a rise of the price level has affected some 
stationary income such as a pension or an annuity. 

a. Does the person receiving the income realize that it has 

declined in purchasing power? 

b. If so, what is his (or her) explanation of the decline? 

i. Is it based on changes in value of commodities? 
ii. Is it based on changes in the purchasing power of money? 

c. Which of the two explanations appears to be the more correct ? 

d. How, if at all, could the receiver of this stationary income 

protect himself (or herself) from a loss in its purchasing 
power ? 

e. What is the likelihood that changes in the purchasing power of 

stationary incomes will discourage savings and investments ? 

3. Assume prices for eleven important commodities for two given 
years, say 1914 and 1919. 

a. Compare the price level for the two periods. 

b. How would the change in price level have affected an annuity 

of $800? 

c. How, if at all, would you expect this change to affect wages 

in general? wages of any particular group? 

d. How should wages be so adjusted as to place the wage-earner 

in 1919 on the same income level he had occupied in 1914? 

e. What change should be made in the weight of the gold dollar 

in order to give it the same purchasing power in 1919? 



1. If, during a single night, the general price level should double, 
what would be the immediate effect and the long-run effect on the income 
of each of the following : 

a. Wheat-grower? 

b. Owner of a gold mine? 

c. Day laborer? 

d. Jewelry manufacturer? 

e. Civil War pensioner? 
/. High school student? 



FLUCTUATIONS OF THE PRICE LEVEL 279 

2. Since the fluctuations of the price level tend to create social 
unrest, why does not the government set the prices of all commodities 
and fix labor incomes ? 

3. Account for the fact that wages invariably react slowly to a rising 
price level. 

4. Why does the government make little or no effort to prevent 
crises ? 

5. Discuss the practicability of changing the weight of the gold 
doUar to correspond with changes in general price level. 

SUPPLEMENTARY READING 

Bullock, Introduction to the Study of Economics, 3d ed., pages 333-348. 

Ely, Outlines of Economics, 3d ed., pages 317-343. 

Fetter, Economics, Vol. II, pages 48-54. 

Fisher, Elementary Principles of Economics, pages 144-164. 

Seager, Principles of Economics, pages 375-382. 

Seligman, Principles of Economics, 5th ed., pages 456-473. 

Taussig, Principles of Economics, 2d ed., Vol. I, pages 290-309. 



PART V 

DISTRIBUTION OF THE SOCIAL INCOME 



CHAPTER XXI 
DISTRIBUTION OF WEALTH IN THE UNITED STATES 

65. Differences in Wealth and Income 

Meaning of distribution, — Distribution, as we have already 
seen, means the sharing of the products of industry among the 
factors of production — land, labor, and capital. The shares 
that go to these factors are respectively, rent, wages, and in- 
terest. Usually two other portions are set aside. One is the 
profits of the enterpriser ; the other, the taxes of the govern- 
ment. Thus, in reality, we must account for five shares in 
distribution; and in doing so we must exercise supreme pre- 
caution, for no other phase of our economic life has called forth 
such bitter controversies or created so much social unrest. 

Distribution and free land. — We may say, with reasonable 
assurance, that the problem of distribution is a modern one. At 
least its importance, so far as the United States is concerned, is 
now many times greater than it was a century or even a half 
century ago. The explanation is not difficult. It is, like a 
great many other explanations of American developments, 
intimately associated with the opportunity each man had to 
settle on practically free land. As long as it was not only 
possible, but also fairly easy for each one to acquire a farm for 
himself, he who was dissatisfied with his share in distribution 
had a fair opportunity to go on the land where he would control 
all of the shares. Hence, little was heard of the poorly paid 
laborer, the bloated capitalist, or the rich landlord; for all 
labored; almost all were capitalists in the sense that they owned 

283 



284 ELEMENTARY ECONOMICS 

their tools, and all had a fair chance to get land. Laborers in 
those days felt little or no need of organizing to secure a larger 
share in the distribution of products. They saw very clearly 
in most cases the straight road that led from the employee to 
the employer class. Capitalists as such were few. Hence, the 
share in distribution that went to them was comparatively 
small. As the amount of free public land became less and less, 
the importance of distribution became greater and greater. 
The supply of free land not only declined, but also, what is more 
important, it receded westward, making itself unavailable to 
the workers and capitalists of the East. First the worker lost 
the opportunity to escape to the land, and next, owing to 
developments in production, he lost control of his tools. , Then 
he began to lean heavily on capital for support; and then 
capital began to play an increasingly important part in pro- 
duction. Here we find for the first time in the history of the 
United States sharp lines separating the factors of production, 
and hence, the shares in distribution. 

Present-day distribution. — Under more primitive conditions 
the typical, individual income, as we have just seen, was made 
up of several indistinct parts. For his labor he received wages ; 
for his land, rent ; for his capital, interest ; and for his business 
skill, profits. He had, at the best, but a hazy notion of the 
size of each share. The same situation still holds in agriculture. 
No farmer can estimate even with any degree of accuracy just 
what portion of his yearly income ought to be attributed to 
wages, to rent, to interest, or to business ability ; and no one 
else can do it for him ; for the four factors, being embodied in 
one person, are inseparable. In most other productive lines 
no such difficulty is encountered. There, we can usually deter- 
mine what portion of the product each factor gets, though the 
problem of how much each factor ought to get still remains un- 
solved. There, for example, the wages of the laborer approxi- 



DISTRIBUTION OF WEALTH 



285 



mates his total income. His returns in the form of rent or 
interest are likely to be comparatively small. Likewise, to a 
less degree, the income of the landowner (not farmer) is rent ; 
of the capitalist, interest ; and of the enterpriser, profits. 

Here we have the cause for distribution tending to become a 
class problem. Each group, having lost an interest in the 
shares of the other groups, strives to increase its own share at 
their expense. The result is mutual misunderstanding. Labor 
complains of the greediness of capital, while capital in turn 
complains of labor's unwarranted demands. Neither appre- 
ciates the part the landowner plays, while all three resent having 
to pay tribute to the enterpriser, whose duty it is to bring them 
together for productive labor. 

Distribution of income and wealth. — We may, with no regard 
to the source of the income of each class, also examine the dis- 
tribution of incomes and wealth among classes. Yet it would 
not be far wrong to say that the lower income groups are made 
up almost entirely of laborers, while the higher income groups 
comprise, for the most part, landowners, capitalists, and enter- 
prisers, and the so-called professional people. Professor King 
estimates incomes among American families as follows : 



Annual Income 


Percentage of 

Families Receiving 

Less than this 

Income 


Annual Income 


Percentage op 

Families Receiving 

Less than this 

Income 


$200 


.07 


$1500 


90.31 


300 


1.04 


1800 


93.67 


400 


7.17 


2000 


94.86 


500 


16.70 


2400 


96.18 


700 


38.92 


3000 


97.42 


1000 


69.43 


3600 


98.10 


1200 


81.69 


4000 


98.39 



An examination of this estimate — for it can be nothing more 
than an estimate — reveals many significant facts. First, the 



286 



ELEMENTARY ECONOMICS 



annual income of more than two-thirds of the famiHes is less than 
$1000 each, while less than one-tenth of the families each enjoy 
an income of $1500 or more. Second, the number of families 
having yearly incomes of as much as $3000 is relatively small 
(2.58%). To be more specific, a small tradesman or a skilled 
mechanic with an annual income of near a thousand dollars, 
even though a portion of it be derived from savings or land, 
belongs to the upper minority. Also higher-paid railroad em- 
ployees, such as train conductors and locomotive engineers, 
must be grouped among the highest one-twentieth. 

Another carefully prepared estimate (made in 1918) throws 
light on the number of families and individuals in each income 
group. Estimating the total number of incomes at 27,000,000 
and the aggregate income of all groups at $38,000,000,000, the 
following conclusions were reached : 



Average Income 


Number op Families 


Per Cent of 
Total Income 


Per Cent op 
No. OP Incomes 


$ 850 (or less) . 


7,275,000 


12.3 


26.9 


1,000 . . . . 


3,500,000 


9.4 


12.9 


1,250 








2,250,000 


7.4 


8.3 


1,500 








1,600,000 


0.3 


5.9 


2,000 








385,000 


2.0 


1.4 


3,000 








167,000 


1.3 


0.6 


4,500 








72,000 


0.8 


0.3 


7,500 








26,500 


0.5 


0.1 


12,500 








45,000 


1.5 


0.2 


75,000 








1,787 


0.4 


0.1- 


1,000,000 








100 


0.3 


0.1- 


2,500,000 








34 


0.2 


0.1- 


5,000,000 (and over) 


10 


0.3 


0.1- 



It is to be noticed in the above table that the number of 
annual incomes of $1000 or less (column 2) is relatively twice as 
great (column 4) as the share of the total income received by 
that group (column 3) ; also that as the average income rises it 



DISTRIBUTION OF WEALTH 



287 



enjoys an increasingly large proportion of the total income (com- 
pare columns 3 and 4). 

Expenditure of family incomes. — Quite as important as the 
differences in the sizes of incomes is the manner in which families 
of various groups expend their respective incomes. Some years 
ago the United States Commission of Labor made the following 
estimate : 



Object op Expenditure 



Food 

Rent 

Clothing . . . 

Fuel 

Lighting . . 
All other purposes 



Income 

Under 

$200 



Per Cent 

49.64 
15.48 
12.82 
7.07 
1.01 
13.98 



Income 
$300 

AND 

Under 
$400 



Per Cera 

45.59 
14.98 
14.14 
6.04 
0.98 
18.27 



Income 
$500 

AND 

Under 
$600 



Per Cera 

43.84 
15.15 
15.27 
5.63 
0.97 
19.14 



Income 
$700 
and 

Under 
$800 



Per Cera 

38.89 
15.60 
16.33 

4.42 
0.88 

23.88 



Income 

$900 

and 

Under 

$1000 



Per Cera 

34.34 
14.96 
16.84 
4.00 
0.74 
29.12 



Income 
$1200 

AND 

Over 



Percent 
28.63 

12.59 

15.71 

2.57 

0.45 

40.05 



Many other investigations of incomes have been made and 
all seem to point to the same general conclusion : 

1. As the income of a family increases the relative amount 
spent for food decreases. 

2. Approximately the same relative amount is spent for rent 
irrespective of size of income. 

3. Increase in income is accompanied by an increase in the 
amount spent for education, recreation, amusement, etc. 



66. Some Social Problems Arising from Distribution 

Class antagonism. — We can now see that the members of our 
modern industrial society may be grouped according to the 
shares of income — wages, rent, interest, and profit ; also 
according to total income irrespective of its source. In either 
case there is a cause for class antagonism, particularly on the 



288 ELEMENTARY ECONOMICS 

part of those whose incomes are relatively low. Any self- 
respecting head of a family with an income of less than eight 
hundred dollai's — there are millions of them — is likely to 
regard such inequalities of income and wealth as appear in the 
preceding table as a rank social injustice ; while those having 
still lower incomes are tempted to hate an industrial system that 
permits such differences. They naturally take the position 
that no one family deserves or needs an income equal to the 
total income of a fairly large city composed of laborers. The 
most stolid of them know perfectly well that the interests of 
industrial society are not furthered by permitting one man or 
one set of men to appropriate for their own use hundreds 
of millions of dollars' worth of wealth. By a simple calculation 
they see single Americans controlling more property than the 
entire total taxable property in a city like Des Moines or Indian- 
apolis. They see the income of a small group of capitalists equal 
the total income of all the laborers of a city like Cleveland or 
Denver. What wonder, then, that there is social unrest and 
class antagonism ! 

Entirely different is the usual attitude taken by the mem- 
bers of the higher income groups toward their less fortunate 
brethren. They, on their part, are satisfied with existing 
conditions ; and in this self-satisfaction lie the dangers that 
always mark class antagonism. Too often they explain 
misery and poverty by saying that it is the result of indolence, 
intemperance, or vice ; failing to see, however, that intemper- 
ance, for example, is a result as well as a cause of poverty. 
Fortunately, serious-minded men and women are attacking the 
problem of inequality in a business-like manner. Instead of 
scattering alms among the poorly paid, as did the sultans of 
Arabian Nights fame, they are teaching men and women how 
to help themselves, not only by increasing their incomes, but 
also by spending them to better advantage. Few expect or 



DISTRIBUTION OF WEALTH 289 

even desire to see property holdings or incomes made equal. 
Few object to the comforts and luxuries of the rich. Few 
dream of an industrial millennium in which no distinguishing 
marks shall separate one group from another. Many, however, 
are determined that the dirty tenement must go, that the sub- 
merged tenth must be made self-supporting, that free and 
universal education must become a reality, and that every one 
must have a fair chance to develop himself industrially. If 
this spirit of service and helpfulness ever pervades the upper 
income groups, which it must if American society and democ- 
racy are not to be endangered, we may expect, not necessarily 
a leveling of incomes, but certainly a more equitable distribution. 
Industrial inefficiency. — Either extreme in the matter of 
income tends to make its possessors industrially inefficient. It 
is trite to say that a man whose income is insufficient to nourish 
his body properly is an inefficient worker. Since millions of 
men and even whole families have such an income, it follows 
that great numbers of workers in this country are inefficient. 
Employers contend that they cannot pay more wages until 
efficiency is increased ; but efficiency cannot be increased 
without an increase in wages. Here clearly is the place for 
society to do what no employer feels justified in doing and what 
few inefficient workers can do for themselves. Already, as 
we have seen, individuals and private associations are working 
in this direction. But this is not the work of one or two or of 
a hundred. Society alone can reap the reward of a widespread 
elevation of industrial efficiency. Society, therefore, ought to 
bear the expense of elevating it. Again, too high an income 
also tends to industrial inefficiency. Nothing has yet been 
found that can take the place of the desire for comfort and 
moderate luxury as a stimulus to economic activities. A high 
salary, for example, is a fair indication of efficiency, but not, 
by any means, a cause of efficiency. 



290 



ELEMENTARY ECONOMICS 



Proportion of all Homes Owned Free, 
Owned Encumbered, and Rented, by 
States: 1910. 



MAINE 
N.H. 



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No account of 
the causes of in- 
dustrial inefficiency 
would be complete 
without some no- 
tice of the effects 
of indolence, intem- 
perance, and vice. 
It seems to be a law 
of human nature 
that all work is 
more or less irk- 
some. Fortu- 
nately, a majority 
of people possess 
enough will power 
to overcome indo- 
lence. There are 
those, however, who 
prefer privation 
and even hunger to 
manual or mental 
labor. Their great- 
est need is ambi- 
tion. The drinking 
of alcoholic liquors 
also destroys effici- 
ency. Scientists are 
agreed that no one 
can be at his best 
with the least trace 
of alcohol in his sys- 
tem. Managers of 



DISTRIBUTION OF WEALTH 291 

large industrial plants are unanimous in their testimony that 
the drinking habit among employees is the chief source of their 
inability to get a maximum production. Fortunately, this 
source of inefficiency, owing largely to the stand taken by 
employers, is rapidly disappearing. Vice, which likes to 
associate itself with alcohol, also destroys industrial efficiency. 
Gambling, loafing in billiard rooms, and sexual abuses unfit 
one for economic activity. 

Midway between these sources of inefficiency and the ineffi- 
ciency itself, is illness. First comes indolence, intemperance, or 
vice ; next, bodily or mental illness, and then, industrial in- 
efficiency. The indolent man is usually ill or easily made so 
when there is a prospect of work. Intemperance leads to all 
sorts of ills. So also does vice. There are those unfortunates, 
however, that must not be blamed for their physical or mental 
shortcomings. Some are born incapacitated for work, some 
are the victims of greed or accident, some are undernourished 
in spite of their best efforts and intentions. These deserve first 
consideration at the hands of society. 

67. Proposed Solutions 

Voluntary. — We have already noticed the attempts of in- 
dividuals and associations to equalize distribution by carrying 
charity and education to those who need help. We may now 
examine briefly some ambitious attempts to secure for various 
classes, particularly for workers, a larger share of the social 
income by securing for them a portion of the shares that usually 
go to other factors of production. 

Cooperation in retailing, particularly in foodstuffs, has had 
some success in this country, though to a much less extent than 
in England. The chief aim of cooperative enterprises is to 
eliminate the enterpriser, and thus to divide the profits which 
would ordinarily go to him among the members of the enterprise. 



292 ELEMENTARY ECONOMICS 

Even among the higher income groups, attempts are often made 
by individuals associated together to increase their incomes in 
the same way. Cooperative dairying, cooperative grain-buying, 
and mutual fire insurance organizations are examples. 

Compulsory. — Society has through taxation already done 
something in the way of equalizing distribution. The poorest 
child in New York has as many privileges in the city parks as 
has the largest taxpayer. Nor are distinctions made in the 
matter of schools, of police protection, of fire protection, of 
sanitary regulations, or of garbage collection. Such public 
activities as these, which are supported by public taxation, 
relieve the lower income groups of a heavy burden, thereby 
securing for them indirectly a larger portion of the social income 
than they would otherwise get. Still another method of lessen- 
ing inequalities in distribution by taxation is shown by the 
inheritance, excess-profit, and income taxes. In each case, 
those who have much are compelled by force of law to give, indi- 
rectly to be sure, to those who have little. 

The socialists, about whom we shall have more to say farther 
on, propose that the state itself assume all the functions of the 
capitalist and the enterpriser, thereby securing for the workers 
the entire amount of interest and profits that now goes to these 
two classes. For that reason socialism is a distributive problem. 
It is significant to note in this connection that many of the 
enterprises recently undertaken by the government, such 
as the construction of irrigation dams and ditches, are, despite 
the opposition that has developed against anything socialistic;, 
advocated by socialists. 

EXERCISES AND PROBLEMS 

A 

1. Define "distribution." 

2. Why are profits and taxes shares in distribution? 

3. What is the intimate i-elation between free land and distribution ? 



DISTRIBUTION OF WEALTH 293 

4. What shares in distribution went to the pioneer farmer ? 

5. Why is it said that free land receded westward ? 

6. Just how did the laborer lose control of his tools ? 

7. What during the past century has caused the Lines separating the 
shares in distribution to become more distinct? 

8. Why is there such a great inequality in wealth ? 

9. Suggest some method for removing this inequality. 

10. What is the relation between income and industrial efficiency? 

11. Name and evaluate the causes of inefficiency. 

12. Why is society interested in the efficiency of the individual? 

13. Just how does taxation tend to equalize wealth and income? 

B 

1. List the names of the heads of families in your block. 

a. Estimate the income of each family. 

b. Are there any noticeable variations among these incomes? 

c. Which families belong to the higher income groups ? the lower 

income groups ? 

d. How does the average family income compare with the average 

family income of your community? 

e. How does your own family income compare with the average 

family income of your block? 

2. Estimate roughly the incomes of the families represented in 
your class. With this estimate as a basis, what are your conclusions 
as to the diffusion of education among the masses ? 

3. Interview persons in different income groups. 

a. Do you find any spirit of class antagonism ? Analyze. 

b. What reasons do you find advanced to explain inequalities ? 

c. Inquire about solutions of the problem. 

d. Formulate your own conclusions in the matter. 

4. From observation and inquiry determine as accurately as possible 
how business men regard the following : 

a. Drinking of intoxicating liquors. 

b. Irregular hours. 

c. Habits that destroy mental or physical strength. 

d. Expensive tastes. 

e. Idleness and loafing. 

5. Suppose you were asked to devise a scheme for equalizing incomes 
through taxation. 



294 ELEMENTARY ECONOMICS 

a. What public enterprises would you create or enlarge ? 

b. How would you regard the extension of public education? 

c. Would you favor siipplying free bread or free meat? Why, 

or why not ? 
i. How does c differ from b? 
ii. Which would meet the greater opposition? 

d. Would you exempt all except the very rich from paying taxes ? 

Why? 

C 

1. "Poverty is an individual matter. No man need be poor in a 
country like the United States, where industry constantly cries for 
laborers." Comment on the above statement. 

2. Many well-to-do men argue that it is little or no concern of theirs 
if individuals refuse to be temperate and thrifty. 

a. Is this a correct attitude? 

b. Under what circumstances is society to blame for intemper- 

ance? 

c. Would the well-to-do be profited financially by an increase in 

temperance or thrift ? Explain. 

d. Should "the strong bear the burdens of the weak" ? 

3. What is the relation of each of the following to attempts to dis- 
tribute wealth and income more equally through ta.xation : 

a. Free public education? 

b. City parks? 

c. City milk inspection? 

d. Public highways? 

e. Pure-food laws? 

/. Free band concerts? 

g. Public recreation grounds ? 

SUPPLEMENTARY READING 

Bullock, Introduction to the Study of Economics, 3d ed., pages 411-423. 

Ely, Outlines of Economics, 3d ed., pages 384—406. 

Fetter, Economics, Vol. II, pages 470-490. 

Fisher, Elementary Principles of Economics, pages 476-486. 

Seager, Principles of Economics, pages 170-197. 



CHAPTER XXII 
RETURN TO LABOR (WAGES) 

68. NONCOMPETING GrOUPS OF WORKERS 

Existence of these groups. — Practically every one engaged 
in economic activities may be said to be a worker, and as such to 
receive wages in some form. Employees are not thd only ones 
who earn wages. A portion of the income which goes to enter- 
prisers of all sorts — farmers, merchants, independent mechanics, 
and professional men — is wages. These workers may be 
divided into rather distinct groups, and each group in turn 
divided into an indeterminate number of subgroups. At the 
top are captains of industry, manufacturers, merchants, pro- 
fessional men, clerks, and public officials. This group is 
distinguished from the other group by its relatively high income 
level. Among economists it bears various titles, such as " soft- 
handed," " kid-glove," and '' white-collar." This group may be 
divided, according to income, into two subgroups : captains of 
industry and a few highly paid professional men comprise one ; 
in the other subgroup are found the rank and file of professional 
men, clerks, and all others whose labor is not characterized by 
hard manual work. The second group, the " hard-handers," 
enjoys less income as a group, though in this respect, its higher 
paid members stand ahead of the lower members in the first 
group ; that is, the two groups overlap in the matter of income. 
In this lower group may be distinguished three subgroups : (1) 
highly paid manual laborers, such as railroad engineers, expert 
machinists, and glass blowers ; (2) the rank and file of skilled 

295 



296 ELEMENTARY ECONOMICS 

laborers ; (3) unskilled laborers. The first of these three sub- 
groups comprises the aristocracy of the manual laborers. Its 
members enjoy a much higher income level than do millions of 
professional men, farmers, merchants, clerks, and public officials. 
In fact, those i,n subgroup number two, and even some in the 
third, rank higher in the matter of income than the poorest paid 
workers among the soft-handed group. 

The question may properly be asked why workers do not 
promptly overcrowd the higher-paid positions, thereby tending 
to equalize the incomes of all, irrespective of the nature of their 
employment. An adequate answer involves many consider- 
ations. First, only those of superior ability can possibly reach 
the higher levels among the " soft-handers." Second, a ma- 
jority of workers are unable or unwilling to undergo the long 
preparation necessary to attain the positions held by the pro- 
fessional groups. Third, many persons are not physically fit to 
perform the labor required of such workers as engineers. 
Fourth, the opportunity of advancement is greater in the " soft- 
handed " group.. Fifth, many persons prefer minor " positions " 
which do not bring them into contact with the dirt and grime 
of industry to a higher-paid "job" which, in their minds, is 
dirty and degrading. 

We say that these groups are noncompeting because the 
members of one group do not compete against the members of 
another group. The members of each group, however, compete 
among themselves. This they do both directly and indirectly. 
Ordinarily, the purchasing power which the typical consumer has 
to distribute among the members of any one of these groups is 
fixed within rough limits. What goes to one member must be 
withheld from another. Money spent for dental work might 
have been used to pay an architect for drawing a house plan. 
Indirect competition is also important. Physicians, to be sure, 
cannot step into the law courts as attorneys, but their children 



RETURN TO LABOR (WAGES) 297 

can easily become lawyers. Likewise, the children of lawyers 
may take up ;the practice of medicine. In either case the 
tendency is, if not to stay in the same profession, to remain in 
the same noncompeting group, which, in the long run has the 
same effect. 

Movement among the groups. — Certain forces tend to accel- 
erate the movement of individuals from one group to another, 
while other forces tend to retard such movement. We like to 
boast of the opportunities which every boy has in this country 
to follow his bent in choosing a trade or profession. Un- 
doubtedly there are good grounds for this boast. Examples of 
individuals rising from poverty to affluence are not wanting. 
Here a great captain of industry began life as an office boy ; 
there a noted physician sprang from the ranks of the illiterate. 
Less noticeable, because they are less extreme, are the millions 
of cases of individuals moving from the ranks of unskilled labor 
to the subgroup above, from farm laborer to farm tenant to 
farm-owner, from the poorer paid professions to the higher paid 
ones. Thus there is a constant movement upward. There is 
also a movement downward, much less in volume and extent 
than the one upward, and not nearly so important. It is a 
filtering process largely caused by poor health, misfortune, 
indolence, lack of ambition, and intemperance. 

These movements among industrial groups meet more 
obstacles than a great many people suspect. The son of an 
unskilled laborer, other things being equal, has a poorer chance 
to become a physician, than has the son of a lawyer or a mer- 
chant. He lacks, first, a proper home environment ; second, 
an ambition to attain a relatively high industrial position; 
and, third, the means of getting the necessary preparation which 
members of the upper groups must have. An examination of 
the industrial groups of any community will bear out this 
statement. Suppose we study the family histories of a group 



298 



ELEMENTARY ECONOMICS 



Average Number of Wage-Earners by Industries : 1909. 



HUNDRCOS or THOUSANDS 



T1MBE.R 

,.i.::;.,;:"::;:,i';,::::':,'::r'„::::'::.::i:: 



■^D MACHINE-SHOP 



xz: 



COTTOM QOODS 



CARS AND GENERAL SHOP CONSTRUCTION. AND REPAIRS 



SITING AND PUBLISHING 

:.:i ' , , c 



l?ON ANO STEEL, STEEL WORKS, AND WOLLmfl MILLS 



MEN'S CLOTH 



BOOTS AND SHOES ' 



WOOLEN, WORSTED, AND FELT GOOD9 



WOMEN'S CUOTHlNGi 



HOSIERY AND KNIT GOODS 



FURNITURE 



DSI 



SILK AND Silk goods 



SLAUGHTERING AND MEAT PACKINO 
ELECTRICAL MACHINERY 



PAPER AND wood PULP 



AUTOMOBIUCS 



COPPER, TIN. AND SHtET IROM 



CARRIAGES AND WAGONS 



GARBLE AND STONE WORH 



CANNING AND PRESERVING 



- LIQUORS. MALT 



AGRICULTURAL IMPLEMENTS 



CONFECTIONERY 

car's, steam RAILROAD 

//br'Ass ano bronze 



RETURN TO LABOR (WAGES) 299 

ni carpenter's apprentices. Some are almost sure to come from 
the ranks of unskilled labor, while the rest belong to the skilled 
mechanics group. Only occasionally should we find among them 
the son of a lawyer, doc,tor, merchant, or teacher. Suppose 
further that we should question the students of medical colleges 
concerning the industrial status of their parents. A few, but 
only a few, might answer that their respective fathers were 
carpenters, or plumbers, or electricians, or even unskilled 
laborers. Most of them, however, would say that their respec- 
tive fathers were professional or business men, such as lawyers, 
dentists, teachers, merchants, and farmers. 

Education and income. — If, as we have said, the students 
of a professional school or college belong to the upper income 
groups, the question naturally arises. What is the relation be- 
tween public education and income f One of the reasons usually 
given for expending large sums of money on public education is 
that it helps to equalize industrial opportunity — that is, public 
education tends to start all alike in the industrial race. Just 
how far is this reasoning valid ? It is a well-known fact that an 
educated person, other things being equal, is more efficient than 
one uneducated ; also that increased efficiency leads to higher 
incomes. It is equally well known that education beyond the 
grades, certainly beyond the high school, requires an outlay of 
money which only a relatively few families can afford to make ; 
and these families, let us not forget, already belong to the higher 
income groups. Hence, education is not only a cause, but also 
a result of relatively high incomes. 

If we should question the existence of this close mutual 
relationship, we have but to turn for corroborative evidence to 
the income schedules which appear in the preceding chapter. 
There we find a large majority of families getting less than a 
thousand dollars a year each, while millions of them are com- 
pelled to subsist on half the amount. Families with such in- 



300 ELEMENTARY ECONOMICS 

comes find it increasingly difficult to keep the children in school 
as they advance from one grade to another. By the time they 
reach high school age but few of them remain. One after an- 
other of those who enter high school withdraw to go into in- 
dustry, so that bj^ the time the senior year is reached the 
number left is greatly reduced. The next educational step they 
find the most difficult of all. So difficult is it that few have the 
courage to undertake it, for " going " to college or a technical 
school for a long period of years is not to be faced lightly even 
by those who have financial backing. Under such conditions 
it is not difficult to understand why the higher income groups 
have a virtual monopoly of higher education ; and why, as 
a result, education depends on income quite as much as income 
depends on education. 

Our notion of the ease with which individuals are able to 
pass from lower to higher income groups is often based on a mis- 
understanding of the nature of these groups. We point to the 
fact that a certain successful business man began life as a 
newsboy, which may or may not be significant in this con- 
nection ; for not all newsboys by any means belong to the 
ranks of unskilled labor or even of skilled labor. So it is with 
boys that sweep out offices, run errands, clerk in stores on 
Saturdays, or spend their summers on the farm. It is repeatedly 
pointed out that the farm and the small town serve as excellent 
sources from which successful city business men are recruited. 
There is no denying that this has been the case ; yet, true as 
the statement is, it should not carry the implication that these 
boys were drawn from the lowest income groups. It would be 
nearer correct to say that a majority of them, despite their 
success, never leave the group in which they were born ; for, 
from the standpoint of education, there is practically no differ- 
ence between a family income of two or three thousand dollars 
a year and one a hundred times as great. 



RETURN TO LABOR (WAGES) 



301 



Per Cent Attending School in the Total Population and in 
Certain Classes 6 to 20 Yeabs of Age : 1909-1910. 



too 



eo 



eo 



70 



60 



7 e 9 10 II 12 13 14 IB 16 17 18 19 20 



40 



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8 iO II 12 13 14 15 16 17 18 19 20 

ACE 



302 ELEMENTARY ECONOMICS 

Choosing among income groups. — Obviously, the boys 
belonging to the higher income groups have an advantage over 
those of lower groups in the matter of choosing their life's work, 
and hence, roughly speaking, the size of their wage income. 
To simplify the problem let us assume that a normal boy about 
to be graduated from high school is trying to decide whether he 
will enter business with the view in mind of becoming an enter- 
priser, of studying for one of the professions, or of learning a 
trade. What shall be the determining factor in the decision? 
First of all, he must decide to his own satisfaction the definition 
of success. If to have command over capital and labor, and to 
enjoy a relatively high income is the goal, then the answer 
must be business. If, on the other hand, his goal is a moderate 
income combined with leisure and a certain kind of content- 
ment, he ought to choose a profession or a trade. In making 
the choice, however, certain well-known facts concerning the 
probability of success should be taken into account. Business is 
much like a lottery with its few capital prizes and many blanks. 
For every successful business man in a large way there is a 
multitude composed of mediocre ones and failures. . Every 
large city has a throng of struggUng shopkeepers to set over 
against its relatively few merchant princes. The boy, there- 
fore, that would enter business must be prepared to assume the 
risks which it necessarily entails. In the professions and trades, 
however, the situation is different. There no huge money prizes 
and but few blanks exist. Any one with ability enough to 
complete a high school course can look with a reasonable degree 
of assurance toward making a comfortable living and a fair 
financial success as a lawyer, doctor, teacher, engineer, architect, 
or skilled mechanic. Beyond this a few can go, reaching the 
financial level occupied by high-salaried officials of railroad or 
insurance companies ; but none can hope to amass the wealth 
of a Rockefeller or a Carnegie. Now and then we find a pro- 



RETURN TO LABOR (WAGES) 303 

fessional man who has by his own skill and talent accumulated 
a million dollars, but this is not a capital prize in an industrial 
society which includes in its membership thousands of million- 
aires. 

69. Efficiency and Wages 

Conditions affecting efficiency. — Differences in efficiency of 
workers may be easily observed on every hand. Sometimes 
these differences exist in the workers themselves. Two men 
working side by side at similar tasks often produce unequally. 
One is alert and nimble ; the other, sluggish and awkward. One 
takes pride in his work, the other grumbles at his lot and watches 
the clock. Each is the creature of birth, training, and habit. 
Industrial efficiency varies also from place to place among 
workers of equal ability. One manufacturing plant, for example, 
provides recreation grounds, rest rooms, lighted workshops, and 
sanitary surroundings. Here workers, other conditions being the 
same, can produce more than can an equal number in a plant 
less well equipped. Differences among peoples also play an im- 
portant part in efficiency. A Chinese coolie is no match for an 
American laborer. One is listless, uneducated, and small of 
stature ; the other, directly opposite in every detail. In China 
it is a common sight to see four or five men lifting a load which 
one man in this country could lift with ease. 

Wages and industrial efficiency. — Since there are such 
great differences in degrees of efficiency, the question naturally 
arises : What is the relation of efficiency to wages ? In the case 
of the two workers side by side, the more efficient one, if they 
were doing piece work, would get the higher wage. If, as is often 
the case, the two men had previously agreed to work for the same 
wage, then no difference would exist, the wages of either being not 
greater than the contribution of the less efficient to the product. 
Differences in wages may or may not occur when similar work is 



304 



ELEMENTARY ECONOMICS 



«» 




Copyright Underwood & Underwood, New York 

A Group of School Children Being Fed at Public Expense. 



RETURN TO LABOR (WAGES) 305 

being carried on in different plants. Clearly, the workers in the 
better equipped plant will turn out a larger product than those 
in the poorer plant ; yet if the difference is absorbed in paying 
for athletic fields, rest rooms, and other devices for securing 
efficiency, the employer has no more to distribute among his 
employees than does the owner of the poorer plant. We may 
say, however, with assurance, that physical conditions which 
contribute to efficiency usually earn more than their cost. 
When we compare the efficiency of one nation with that of 
another we are sure to find the most efficient group getting the 
largest wage. Coolie labor, which we have noticed as being 
inefficient, is poorly paid. A Chinese unskilled laborer can be 
employed for a few cents a day, and even at that he is highly 
paid, for his efficiency is extremely low. 

The relation between wages and industrial efficiency is 
mutual. Stupidity and awkwardness may result, as we noticed 
in the preceding chapter, from low wages. An underfed work- 
man is in no shape to do his best. He is listless and he soon 
grows weary with his task. It is an easy matter to say to him 
that the way to secure an increased wage is to increase his 
efficiency. It is an entirely different matter, however, to per- 
suade him to make additional efforts without providing him with 
sufficient food, clothing, and shelter to make the efforts possible. 
Fortunately, enterprisers like Henry Ford have had the courage 
to try the experiment of increasing efficiency by increasing 
wages ; and we are told by unbiased observers that these 
experiments, particularly the one at the Ford plants, have 
succeeded. Here may be the solution of one of the most per- 
plexing problems in American industrial life. 

Women in industry. — One of the pressing industrial ques- 
tions of the present generation is the relation of the efficiency 
of woman labor to wages ; and this question has been accen- 
tuated by conditions growing out of the Great War. The slogan 



306 ELEMENTARY ECONOMICS 

of organized labor has been " equal wages for equal work," 
meaning thereby that no distinction should be made between 
men and women in paying wages for similar work. For a 
variety of reasons the scale of wages for women has generally 
been lower than that for men, even when the two groups were 
doing the same work. Often, however, work appears to be the 
same when it is not. The mere fact that a man and a woman 
fill similar industrial positions is no conclusive test of their 
relative efficiency. One, for example, may need less super- 
vision, or is a more steady worker, or has greater ambition to 
succeed. Such factors as these are important and must be 
taken into account in any thoroughgoing discussion of the 
relation of woman labor to wages. We can do nothing more in 
this connection than to point out the problems. 

70. Methods of Wage Payment 

Time and piece wages. — The most common method em- 
ployed to remunerate labor is to pay according to time or to the 
labor done. Obviously, time wages are based on piece wages for 
a group if not for the individual. The same industry often 
employs both methods. Farmers usually pay their regular 
help by the month, but employ men to gather corn by the 
bushel. About coal mines also the wages of some employees 
depend on output ; of others, on time. Organized labor gen- 
erally opposes piece wages on the ground that the most efficient 
workers are paid but a fair wage, while those less efficient are 
underpaid. For this position it is criticized by those who 
argue that a time wage takes from the highly efficient and gives 
to the inefficient. Yet as labor leaders say, the interests of the 
few who might possibly profit from a system of piece wages 
must give way to the larger interests of the whole group. 

Piece wages in some industries are impossible. What scheme 
could be devised for paying house carpenters according to their 



RETURN TO LABOR (WAGES) 



307 



output? Ordinarily, the product of one cannot be separated 
from the products of others on the same job. Likewise the 
store clerk, while he may get a commission on his sales, must be 
paid time wages for his time spent in trying to sell goods, and in 
doing various other duties about the store. We may say, there- 
fore, that piece wages can be best paid in those industries where 
each worker's product is distinguishable from the products of his 
fellow workers. 

Profit-sharing. — Numerous schemes have been devised by 
employers to increase output by giving the employees an interest 






"»a 




Counesy of Postum Cereal Co., Battle Creek, Michigan 

Model Workman's Cottage. 
This is but one of many homes which a large manufacturing plant in the 
United States helped its employees to build. 

in the product. One of these, profit-sharing, because of its 
importance, deserves passing notice. This plan in general 
provides that at stated intervals each employee shall receive, in 



308 ELEMENTARY ECONOMICS 

addition to the wages which he has drawn regularly each week 
or each month, a share of the profits of the business. Usually 
no provision is made for the employee sharing in any loss. 
Numerous concerns in the United States have tried out this 
plan with varying success. Some have condemned it after 
trial, others have praised its effect on their business. Its 
highest development has taken place abroad. In Paris, for 
example, a company of house painters instituted the plan 
years ago with the result that in time the employees themselves 
owned the business. Organized labor has generally opposed 
profit-sharing on the ground that an employer can pay bonuses 
at stated periods only by withholding from his employees what 
is rightfully theirs in the form of regular wages. 

EXERCISES AND PROBLEMS 
A 

1 . What is the difference between wages, and wages of management ? 

2. On what ground may workers be divided into hard-handed and 
soft-handed groups ? 

3. Why are railroad men often referred to as the "aristocracy of 
the hard-handed group" ? 

4. What is meant by the expression " noncompeting groups"? 

5. Just how do doctors and lawyers compete? plumbers and 
electricians ? 

6. What is the relation between education and income ? 

7. What are the exact facts about the movement of persons from 
one income group to another? 

8. What should be one of the guides in selecting a profession or a 
trade ? 

9. What is the relation between efficiency and wages? 

10. How does the working environment affect efficiency? 

11. Why is the cheapest labor often the highest paid? 

12. Why do business men usually refuse to pay inefficient employees 
more than they earn, trusting thereby to increase their efficiency ? 

13. Should men and women receive the same wages for the same 
work? Discuss. 



RETURN TO LABOR (WAGES) 309 

14. Wliat is the difference between piece wages and time wages ? 

15. Which is the more fundamental? 

16. Why does organized labor generally oppose the piece-wage 
system ? 

17. Define "profit-sharing." 

18. What does profit-sharing attempt? 

B 

1. Determine by inquiry the occupation or profession of the father 
of each lawyer and doctor in your community. 

a. How many were lawyers, doctors, or business men (including 

farmers) ? 

b. How many were unskilled laborers ? 

c. Explain any marked differences that appear between the 

occupations of the fathers of the younger men on your list 
and the fathers of the older ones. 

d. Formulate conclusions on your investigation as to competition 

between members of the same noneompeting group. 

2. Let each student in the economics class state the profession or 
occupation he expects to pursue. 

a. How many expect to compete directly with their respective 
fathers ? 

h. How many expect to enter other lines in the same non- 
eompeting group? 

c. How many expect to cross over into a group not occupied by 

their respective fathers? 

d. What does this examination show regarding the ease with 

which lines between noneompeting groups can be crossed? 

3. Make a list of several natives of your community who have made 
exceptional success in business. 

a. How did their respective fathers rank in the community as 

to income? as to wealth? 

b. What were their educational opportunities? 

c. Considering differences in time and circumstance, can they 

offer their children better educational opportunities than 
ohey themselves enjoyed? 

4. Call to mind boys engaged in selling newspapers, in sweeping out 
offices, or in similar occupations. 

a. From what income groups do these boys come ? 



310 ELEMENTARY ECONOMICS 

h. How many are the sons of well-to-do parents? 

c. How many attend high school? 

d. How does society in general regard this kind of work by boys? 

e. How do the boys themselves regard it ? 

C 

1. The statement is often made that many college graduates may 
be found in the bread lines of our cities. 

a. What effect on the popular mind has the discovery of one 

college graduate begging for food ? 
h. Does such a discovery make an interesting news item ? Why ? 

c. What is the probability of magnifying such a discovery? 

d. What is the probability of such a beggar pretending to be a 

college graduate? 

e. How, therefore, should the statement be regarded ? 

2. "It can easily be proved from history that a majority of the 
successful men of the United States were reared on farms and attended 
country schools." 

o. Until recent times, where else could an American youth be 
reared ? 

b. Where else, except in the country school, could the previous 

generation get an education? 

c. What is likely to be the trend in coming generations? 

3. Discuss the need of profit-sharing in American business affairs, 
its probable success, and the results that may be expected. 

SUPPLEMENTARY READING 

Bullock, Introduction to the Study of Economics, 3d ed., pages 446-460. 

Ely, Outlines of Economics, 3d ed., pages 427-443. 

Fetter, Economics, Vol. I, pages 211-231. 

Fisher, Elementary Principles of Economics, pages 433-463. 

Johnson, Introduction to Economics, pages 151-172. 

Seager, Principles of Economics, pages 244-261. 

Seligman, Principles of Economics, 5th ed., pages 411-428. 

Taussig, Principles of Econom,ics, 2d ed., Vol. II, pages 147-157. 



CHAPTER XXIII 
THE LABOR PROBLEM 

71. Rise of Organized Labor 

Rise and growth of the trade union. — The forces which have 
combined during the past generation to cause employees to or- 
ganize were of sHght importance prior to the Civil War, and even 
for several years after its close. Then the number of laborers 
in any one establishment was relatively small ; and the oppor- 
tunity to hold conventions, poor. Besides, the abundance of 
public land provided an escape for those who worked for wages. 
Accordingly, only a few small unions were organized prior to 
1860, and these practically disappeared during the four years' 
conflict that followed. The return, in 1865, of more than a 
million soldiers to the ranks of industry, the rapid disappearance 
of desirable and accessible public lands, and the steady increase 
in the size of manufacturing plants, soon began to create a 
feeling, particularly in the eastern states, that laboring men 
ought to organize for mutual protection and advancement. 
About this time there were held several labor conferences which 
declared (1) for an eight-hour day, (2) for restriction on immi- 
gration, (3) for reduction of the tariff, (4) for a relatively small 
standing army, (5) for early payment of the national debt, and 
(6) for the granting of public land only to actual settlers. 
Gradually each trade or craft organized, until at the present 
time practically all skilled trades have their unions. 

Knights of Labor. — The unions which we have just noticed 
are organized according to trades ; that is, the carpenters, the 

311 



312 ELEMENTARY ECONOMICS 

plumbers, the bricklayers, and othe'rs, have each their own 
organization. In 1869, however, a Philadelphia tailor, U. S. 
Stevens, projected an entirely different kind of organization, 
known as the Knights of Labor, in which trade distinctions 
should not appear. Membership at first was restricted to 
garment workers, but later it was thrown open to all except 
bankers, lawyers, professional gamblers, and employees in the 
manufacture or sale of intoxicating liquors. Membership in a 
trade union was no bar to becoming a "Knight." Thus, the 
two types of organization grew side by side without organic 
connections. The aims of the Knights of Labor were to secure 
better conditions for its members through participation in 
politics rather than by the strike or boycott. The slogan of 
the organization was, "An injury to one is the concern of all." 
Thousands of " lodges " scattered throughout the country were 
the local units. These were closely supervised by the national 
officers. Thus, the organization was highly centralized — that is, 
the local lodges had little autonomy. In other words, authority 
came from the top. 

American Federation of Labor. — Membership of the Knights 
of Labor reached its highest point (about five hundred thousand) 
in 1886. Already it was feeling the oppositional influence of the 
American Federation of Labor, which had been organized in 
1881. A little later the older organization began to decline in 
influence ; at the present time its place in labor affairs is un- 
important. The two organizations are unlike in several 
respects. The Federation favors the strike and boycott as 
weapons for fighting the battles of labor. Moreover, as its name 
suggests, it is a federation of trade unions, each governed by its 
own laws and managed by its own officers. Individual members 
of the trade unions and even the local organizations have little 
direct connection with the Federation. Besides the national 
organization there are state federations and city federations. 



THE LABOR PROBLEM 313 

Practically all of the leading trade unions of this country be- 
long to the Federation, the most notable exception being the 
railroad brotherhoods. Since its inception, the American Fed- 
eration of Labor has been instrumental in improving conditions 
of labor and in raising wages. 

Industrial "Workers of the "World. — A sharp distinction must 
be made between a trade union and an industrial union. One 
includes only workers in a particular trade. The other, and in 
this respect it resembles roughly the Knights of Labor, includes 
all workers of an industry such as mining or building. Such a 
union is the Industrial Workers of the World (I. W. W.), which 
contends that the interests of labor are too closely knit together 
to permit its members to be divided among numerous trade 
unions. Hence, the two types of unions are opposed to each 
other. The officers of the American Federation of Labor during 
the past few years have repeatedly criticized both the aims and 
the acts of the L W. W., and warned members of trade unions 
not to affiliate themselves with that organization. The I. W. W. 
in its battles with employers has used a new weapon known as 
sabotage, which may be defined as a " strike on the job " — 
that is, a strike without quitting work. This is accomplished 
by disabling machinery or spoiling the product. In either case 
the employer soon knows that he is being fought by an unseen 
foe, for seldom is the guilty individual ever caught. Conse- 
quently, he must do one of two things : comply with the 
demands of his men or get a new labor force. 

72. Aims and Methods of Organized Labor 

Bargaining power of the worker. — The more zealous advo- 
cates of the laissez-faire doctrine in business have insisted that 
the wage any worker should receive ought to be determined by a 
bargaining process between the worker and his employer. Less 
than a century ago this method prevailed in all industries, and it 



314 ELEMENTARY ECONOMICS 

still persists in fixing the wages of farm laborers, rural school- 
teachers, and store clerks. Obviously, the worker is not on a 
level with his employer in the matter of bargaining. A factory 
owner who employs one hundred hands can usually get along 
very well if one of the hundred should quit work ; also the hiring 
of a hundred-and-first man is of no great consequence to him. 
In either case his net income would ordinarily be affected but 
slightly. The hundred-and-first man, however, has no such 
choice. He must find an employer. He is likely to offer his 
services eagerly, while the employer may meet his advances with 
indifference. Hence, under such circumstances, the employer, 
if he bargains with each of his workers separately, has a decided 
advantage over them. This significant fact laborers, clearly 
recognized long before their organization into unions. It is 
not surprising then that the chief aim of organized labor is to 
unite workers for the purpose of bargaining as one man. This 
is known as collective bargaining. Under these conditions the 
employer can no longer regard the hiring of laborers with in- 
difference ; for now instead of dealing with each individual 
separately, he finds it necessary to deal with the whole force 
as one man. Their refusal to work threatens his profits. This 
group, therefore, can bargain on an equality with the employer. 
Specific demands of organized labor. — Speaking generally, 
the demands of organized labor may be grouped under three 
heads : (1) higher wages, (2) shorter working day, (3) better 
working conditions. Since there must be some relation be- 
tween the productivity of labor and the size of its wage, the 
question naturally arises : From what fund shall an increase in 
wages be paid? It may come from what the employer has 
formerly enjoyed as profits, from consumers in the form of higher 
prices, or from the laborers themselves — provided an increase 
in wages increases efficiency. Usually, we may safely assume, 
the increase comes from the first or second fund, probably a 



THE LABOR PROBLEM 315 

portion from each of them. The shortening of the work day, 
however, appears to have been generally offset by an increased 
efficiency ; that is, a man turns out as much product in ten 
hours as in twelve hours, owing to his ability to increase his 
hourly exertion during the shorter day. Likewise, in many 
occupations an eight-hour day is as good as a ten-hour day, and 
in some kinds of labor a working day of seven or even six hours 
may be employed to advantage. The relation of improved 
surroundings to output is not so easily determined. Those 
in a good position to judge, however, claim that in many cases, 
perhaps in most, employers are compensated in the long run for 
their expenditures in this direction. 

Open and closed shops. — Less important, largely because 
it is less widespread, is the demand of organized labor for the 
closed shop. The closed shop is one in which only union laborers 
are employed, while in an open shop membership in a 
union is not required. Obviously, organized labor prefers the 
former kind of shop, but often circumstances are such as to 
force it to permit its members to work alongside what union men 
call " scabs." Occasionally, employers will not hire union men 
under any circumstance. Thus in reality there are three kinds 
of shops : open, closed, and nonunion. Closely related to the 
question of open and closed shops is the question of open and 
closed unions. Some unions are closed ; that is, the difficulty 
of gaining admission, because of the long apprenticeship required 
or because of the high entrance fee charged, is so great as to give 
its members a virtual monopoly of their trade. Others are 
said to be open. Almost any one can on the payment of a 
nominal fee become a member. Many authorities believe 
that here lies the solution of the problem of organized labor, 
since the ends of both employer and employee, they contend, 
would be gained by making all shops closed and all unions 
open. 



316 ELEMENTARY ECONOMICS 

Methods employed to force the demands of labor. — The 

chief weapon employed by organized labor to get higher wages, 
shorter working hours, and better surroundings has been,' and 
is now, the strike. To strike means to quit work in a body. 
No other method has been found to be so effective, since the 
employer as well as his striking employees feels the evil effects 
of idleness. Usually strikers have the moral support of the 
general public, which may be secured and retained by advancing 
moderate demands and by abstaining from violence. Often in 
spite of the exercise of due care, individual strikers, and even 
groups, breaking away from restraint, hurt the cause by com- 
mitting acts of lawlessness. Especially is this likely to happen 
when the employer attempts to continue his business operation 
by employing nonunion laborers, known in union circles as 
" scabs." Sometimes these nonunion men are bona fide 
workers; sometimes they are strike-breakers, who follow the 
dangerous calling of filling temporarily the place of men on a 
strike, irrespective of the nature of the work. They run great 
risks and are paid high wages. When unemployed they usually 
loaf in low-class saloons, ready at a moment's notice to assist 
in breaking a strike if the employer is willing to pay their price. 
The claim is frequently made that the loss of wages caused by 
strikes is greater than the increases gained by the strikers that 
win. This claim, while it has some foundation, is exaggerated. 
From the best available data on strikes and their cost, we are 
justified in concluding that the per capita annual cost of strikes 
in this country during the past generation, if spread over all 
employees, is small ; also that if the cost be confined to organized 
labor it is npt prohibitive or even excessive. To say that 
strikers have lost a billion dollars in wages since 1880, is esti- 
mating the cost in one way ; to say that the per capita annual 
cost to all employees is one dollar, is estimating it in another 
way. The leading authority on English labor history asserts 



THE LABOR PROBLEM 



317 




318 ELEMENTARY ECONOMICS 

that the annual strike loss sustained by English employees is 
not greater than the loss caused by an extra half-holiday each 
year ; that is, that the loss sustained by each English laborer 
is equal to a half day's wages. Dissatisfied employees may also 
resort to the boycott, which simply means that they, assisted by 
their friends and sympathizers, refuse to buy goods of the 
employers against whom they have a grievance. 

Public opinion and the strike. — Both employers and labor 
leaders recognize the importance of securing the moral support 
of the general jDublic, for the side which secures it almost always 
wins. The public, however, usually has little concern in a 
strike unless it is directly affected. The machinists on a well- 
known railroad went on a strike a few years ago and remained 
out for several years. Few people gave it any attention. Even 
those residing in the same city where the shops of the road were 
located scarcely noticed it. While the strike of the machinists 
was dragging itself out, the street-car men of the same city quit 
work because their demands for higher wages had been refused. 
Within an hour the whole city was aroused. Meetings of 
prominent citizens were called. Committees were appointed 
to try to arbitrate the differences between the car company and 
its striking employees. Even the mayor brought the influence 
of his office to bear on the struggle. Within twenty-four hours 
the matter was settled, the strikers getting the wage increases 
which they. had demanded. We may ask why the people took 
such an active interest in one strike and practically none what- 
ever in the other. One compelled them to walk to their work ; 
the other, as far as they could see, did not concern them. In 
one, the people sympathized with the strikers ; in the other, 
their sympathies were not enlisted. 

Employers' weapons. — It would be a mistake to suppose 
that the employer is defenseless against his striking employees 
First, there are various employers' associations, such as the 



THE LABOR PROBLEM 319 

American Manufacturers Association, organized among other 
purposes for mutual protection against the demands of labor. 
Second, an employer may, if his property is threatened with 
injury, call on the courts for protection. If the court acts 
favorably, the presiding judge issues an injunction against the 
striking employees, which in the past has proved to be an 
effective weapon against labor. Violation of an injunction is 
contempt of court, punishable by fine or imprisonment or 
both at the discretion of the judge issuing the decree. Conse- 
quently, organized labor regards the injunction as dangerous 
to the best interests of the workers, and urges at every oppor- 
tunity the passage of laws that will take such broad powers out 
of the hands of judges. Finally, the employer has the support 
and protection of the state, which guarantees to each one the 
right to carry on his business as he sees fit, as long as he keeps 
within reasonable bounds. 

73. Methods of Settling Labor Disputes 

Conciliation. — A variety of methods for settling labor dis- 
putes has grown up in this country. One of these is known as 
conciliation. Usually neither party to a labor dispute can see 
the merits of the other's claims. Oftentimes a third party, 
either an individual or some government agency, can, by talking 
with the strikers and then with the employer, remove many of 
the differences separating them. In other words, the conciliator 
merely tries to bring the two disputing parties to a mutual 
understanding of the issues involved. Conciliation implies 
persuasion, not force. It means investigation, not award. 

Voluntary arbitration. — As soon as the employer and his 
striking employees are agreed to try to settle their differences 
peacefully they are ready for arbitration. The usual practice 
in this country has been for each side to select an equal number 
of arbitrators, the arbitrators themselves selecting another so as 



320 



ELEMENTARY ECONOMICS 



to avoid the possibility of a tie vote. Each side then presents 
its case. The strikers explain their grievances, and submit as 
much proof as possible in an effort to prove that the employer 
ought to remove their cause. If the question of wages is the 
cause of the strike, the men are likely to argue not only that 
they are entitled to a raise because business conditions will 




Copyright Underwood & Underwood, New York 

An Arbitration Board. 



permit it, but also that their present wage is inadequate to 
support their families properly. The usual contention of the 
employer is that any increase in wages will ruin his business. 
The arbitrators soon learn, if indeed they do not know already, 
that the claim of each party is likely to be greater than its 
expectation. This is but natural since arbitration means com- 
promise. It is their business then to sift all the evidence offered 
and even to make investigations of their own. Finally, they 



THE LABOR PROBLEM 321 

render a decision, which ordinarily both sides accept in good 
faith. Occasionally, however, one or the other party to the 
agreement, becoming dissatisfied with the award, finds a pretext 
for undoing all that the arbitrators have done. 

Compulsory arbitration. — In some countries, particularly 
New Zealand and Australia, arbitration of labor disputes is a 
government matter. There the state steps in when troubles 
arise, and compels the employer and his employees to submit 
their differences for settlement to the proper public officials. 
Under these conditions strikes seldom occur. Nothing so 
strict has been attempted in the United States. Here both 
employer and employees are inclined to resent any interference 
on the part of the government in what they call their '' private 
affairs." Some of the states have adopted partial measures by 
providing permanent arbitration boards to serve if mutually 
agreeable to both the employer and his striking workmen. 
No board, however, has power to compel either party to the 
dispute to submit its differences. In other words, it can usually 
do little more than passively look on unless called in by both 
sides. Whether or not we shall ever go as far as New Zealand or 
Australia has gone in the matter of compelling the arbitration of 
labor troubles is a mooted question. Just now the employers 
regard this extremity much more favorably than do employees ; 
and naturally so, for the last few years has seen a remarkable 
growth in the strength and solidarity of organized labor. 

74. Labor Legislation 

Need for labor legislation. — Up until a century ago prac- 
tically all labor legislation favored the employing classes. The 
evils growing out of the English industrial revolution, however, 
forced Parliament to give attention to legislating for employees, 
particularly for women and children. Gradually there grew 
up in England a system of labor laws that had for their end the 



322 ELEMENTARY ECONOMICS 

regulation of hours and conditions of work. Women, for 
example, were forbidden to work in mines, while the employ- 
ment of children under a certain age was prohibited. The 
influence of organized labor in that country, aided by a com- 
mendable spirit among the governing classes, has done much 
during the past century to make English labor laws the best in 
the world. It was not until much later that the lawmakers of 
this country took up seriously the question of labor legislation. 
Massachusetts was the first state to make a thorough investiga- 
tion of labor conditions, upon which some excellent laws were 
later based. Other states followed the lead of Massachusetts 
until now all of them have done something in the way of 
regulating conditions of labor within their riespective juris- 
dictions. Here, as in England, chief attention has been given to 
women and children. Neither of these classes is as competent 
as men to protect its own interests. Neither is as physically 
strong. Neither is organized so well. Moreover, the well- 
being of the next generation depends on the strength and vigor 
of the women and children of this generation. 

Obstacles to labor legislation in the United States. — Legis- 
lation for the protection of workers in this country has encoun- 
tered several obstacles, three of which deserve notice in this 
connection. First, the typical American has always strongly in- 
sisted on the right to pursue his own economic course without 
the interference of government agencies. Even when he found 
himself at a disadvantage, he was enough of a fighter to want to 
stand on his own feet. Second, the great number of lawmaking 
bodies in this country (Congress and forty-eight state legis- 
latures) makes uniform legislation impossible. Consequently, 
each state legislature hesitates to enact any labor law that 
might drive industry into some other state. A state law, for 
example, which would set the age limit of children permitted 
to work in cotton factories at a higher point than some neighbor- 



THE LABOR PROBLEM 323 

ing state had set it, would run the risk of losing some of its 
cotton factories. Third, the courts of this country, both state 
and federal, have declared many labor laws to be null on the 
ground that they were contrary to the Constitution of the 
United States or to the constitution of the state to which they 
applied. As a result, the will of the people has been thwarted, 
unconsciously to be sure, by constitutions drawn before the 
need for labor legislation had arisen. 

Character of labor legislation in the United States. — In 
spite of these obstacles, the national government and the 
various states have enacted a great many labor laws. In many 
of the states women and children are fairly well protected, not 
only against unscrupulous employers, but also, strange as it 
may seem at first, against themselves. In passing on these laws, 
however, the courts have often been compelled to shut their 
eyes to the Constitution of the United States, which guarantees 
the right of every citizen to make contracts. In the case of men 
they have not been so lenient. In fact, except in the most 
extreme cases, or where the public interest was directly in- 
volved, the courts have usually declared those laws to be un- 
constitutional which restrict the rights of adult males to enter 
into whatever labor contracts they please. Yet it seems safe 
to say that the trend of the times is toward restrictive labor 
legislation for men, for it is practically impossible to'separate 
the welfare of the individual from the welfare of society. Hence 
we have laws abolishing the manufacture of certain kinds of 
matches ; others regulating hours of labor in deep mines ; and 
still others, restricting the number of hours railroad crews 
may work. 

75. Foreign Immigration 

Immigration and labor. — Immigration, since it affects wages 
and. standards of living, is essentially one of the aspects of the 
labor problem. Since the organization of our government in 



324 



ELEMENTARY ECONOMICS 



1789 approximately thirty million foreigners have come to the 
United States. Practically every adult member of this vast 
army became a wage-earner as soon as he arrived, competing 
directly or indirectly with the wage-earners who were already 
here. Until a generation ago most of the immigrants came from 
northwestern Europe, chiefly from Great Britain, Ireland, Ger- 
many, and the Scandinavian countries. Just as this flow of 
human life to the new world slackened, another from southern 

Foreign Immigration into the United States : 1890-1918. 




and central Europe began, and continued with increasing 
volume until the outbreak of the Great War. This we call the 
" newer immigration." Its chief source was southern Italy, 
Greece, Austria-Hungary, and Russia. 

Economic aspects of the newer immigration. — The newer 
immigration, as contrasted with the older one, has several 
important characteristics. First, its members are unskilled, 
without funds, and highly illiterate. Consequently, they have 
for the most part congregated in the cities and about coal mines. 



THE LABOR PROBLEM 



325 



They have filled 
the lowest industrial 
positions, and often 
worked for wages 
much below what a 
native worker would 
have accepted. Ig- 
norant of the laws 
and customs of the 
country they have 
suffered at the 
hands of unscrupu- 
lous employers and 
"bosses," being com- 
pelled to work long 
hours under revolt- 
ing conditions. Be- 
cause of these facts, 
organized labor looks 
unfavorably on un- 
restricted foreign 
immigration. Labor 
leaders see in it a 
weapon which may 
in time be turned 
against them by the 
employer. They see 
also, they say, the 
hopelessness of the 
task of trying to 
instill in the mind 
of the typical immi- 
grant from southern 



Color or Race, Nativity, and Parentage, 
BY States : 1910. 




T~x : 





I NATrve WHITE- NATIVE PARENTAGE ^-^^d^ FOREIGN-BORN WWTE 

1 NATIVE WHITE -FOREIGN OR MIXED PARENTAGE ^^B NEGRO AND ALL OTHEtt 



326 ELEMENTARY ECONOMICS 

Europe the importance of organization. This type of immi- 
gration, however, is somewhat of an asset which we must not 
overlook. It does the " dirty " work which Americans have 
come to regard with disfavor. It furnishes, without expense of 
rearing, a vast labor force. And finally it provides an annual 
market for hundreds of millions of dollars' worth of products 
turned out by native American workmen. 

Social aspects of the newer immigration. — Much of the 
opposition to the newer immigration would not exist, we may 
say with assurance, if it were possible, as it was with the older 
immigration, for the native stock to absorb it. The English, 
Irish, or German immigrant of the earlier period was much like 
the people he found here. All sprang from the same general 
stock. All had similar pohtical ideals. The typical Italian 
immigrant, on the other hand, cannot adjust himself so easily. 
To the average American he is a stranger, inferior in every 
way — industrially, socially, morally. He finds the door closed 
to him and his family. He remains Italian. What is worse, 
his children remain more or less Italian. In short, the American 
melting pot seems to have lost its heat. As a result he keeps 
with his own kind, clings to his own customs, manners, and 
language, and never really becomes a part of the broad current 
of American life. Because of his isolation, organized labor too 
often regards him as undesirable. As it is with the Italian 
immigrant so it is with practically all the immigrants from the 
other countries of southern and central Europe. 

EXERCISES AND PROBLEMS 
A 

1. What three forces operated before the Civil War to prevent the 
organization of labor? 

2. How did the war itself affect these forces ? 



THE LABOR PROBLEM 327 

3. In what essential respects do the Knights of Labor differ from 
labor unions ? from the American Federation of Labor ? 

4. Distinguish between a trade union and a labor union. 

5. Why are the Industrial Workers of the World objectionable as 
an organization? 

6. Why is "sabotage" such an effective weapon against the 
employer ? 

7. Just why is the employee at a disadvantage in bargaining ? 

8. How does collective bargaining remove this disadvantage? 

9. Explain how a laborer can do more work in eight hours than in 
ten hours. 

10. What are the three specific demands of organized labor? 

11. How effective is the force of public opinion in settling strikes? 

12. Why is the employment of strike-breakers so objectionable both 
to organized labor and to the public generally? 

13. What is the essential difference between conciliation and arbi- 
tration? 

14. How does voluntary arbitration differ from compulsory arbi- 
tration ? 

15. What obstacles have hindered labor legislation in the United 
States? 

16. Why have the courts distinguished between men and women in 
passing on the constitutionality of labor laws ? 

17. Why in general does organized labor favor restrictions on foreign 
immigration ? 

18. What is the chief cause of the general objection to the newer 
immigration ? 

B 

1. Consult with an official of a local union. 

a. Get his viewpoint on the labor situation in general. 

h. Inquire about specific rules of work enforced by his union. 

c. Discuss with him the attitude of organized labor towards 

socialism. 

d. Ask him about any strike experiences he may have had. 

2. Call to mind any industrial strike that may have been carried 
on in your community. 

a. Was the public vitally interested in the strike? 
&. Were strike-breakers imported? 



328 ELEMENTARY ECONOMICS 

c. Did the strikers picket the plant in which they had formerly 

been employed? 

d. Which party to the strike was the more eager to arbitrate? 

e. Did the state make any effort to settle the strike? 
/. What was the outcome of the strike? 

3. From a census report or from some other reliable source get 
statistics on the number of persons in your community who are foreign- 
born or who are native-born of foreign parentage. 

a. Which nationality shows the greatest strength ? 

b. Is the parentage of "foreigners" in your community above or 

below that of the United States ? your own state ? 

c. How many children of foreign-born parents attend your 

school ? 

4. Ask each student in the class to state the nationality of his 
father, mother, both grandfathers, and both grandmothers. 

a. How many are "Americans"? 

b. Are any pure English, Irish, German, or Scotch? 

c. How many are descended from two or more of the four 

stocks ? 

d. Formulate conclusions as to the mixtures of these old stocks. 



1. One of the cardinal policies of trade unionism is that all of the 
members of any union should, within narrow limits, receive the same 
wage. 

a. Does such a policy hinder the more skilled workers? How? 

b. How do labor leaders justify this policy? 

c. What determines the wage for such a group? 

d. Why should not the wage for the same kind of work, plumbing 

say, be the same for the whole United States? 

2. Organized labor is often criticized on the ground that it opposes 
the introduction of new machinery and new processes. 

a. Is there likely to be any basis for this criticism? 

b. Would organized labor be justified in taking such a position? 

Explain. 

c. How would such a policy affect production? the wages of 

organized labor? the wages of unorganized labor? 

d. What would be your position in the matter if you were an 

employer? a member of a trade union? 



THE LABOR PROBLEM 329 

3. Many of the wisest labor laws enacted by Congress and the state 
legislatures have been declared unconstitutional by the various courts. 

a. What is meant by the expression "unconstitutionality"? 

b. Where did the courts get this power? 

c. What procedure is necessary to make such laws constitutional ? 

4. "America is a great melting pot in which the peoples of Europe 
are transformed into Americans." 

a. Explain what is meant by "melting pot." 

b. How effective is the melting process just now? 

c. What experiences caused this expression to be coined? 

d. Should it be modified in any respect? Just how? 

SUPPLEMENTARY READING 

Bullock, Introduction to the Study of Economics, 3d ed., pages 468-493. 

Ely, Outlines of Economics, 3d ed., pages 444-491. 

Fetter, Economics, Vol. II, pages 281-332. 

Johnson, Introduction to Economics, pages 173-191. 

Seager, Principles of Economics, pages 536-579. 

Seligman, Principles of Economics, 5th ed., pages 429-447. 

Taussig, Principles of Economics, 2d ed.. Vol. II, pages 261-302. 



CHAPTER XXIV 
RETURN TO LAND (RENT) 

76. Nature and Source of Agricultural Rent 

Contract and economic rent. — The word " rent " is used in 
our everyday speech in a variety of ways. We speak of renting 
an automobile, or a team of horses, or even a dress suit or a pocket 
camera. Usually in such cases, the term " hire " would be more 
applicable ; for it adds to clearness to restrict the use of rent to 
land, or at most to land and its improvements. Even then we 
may have two kinds of rent, contract (commercial) and eco- 
nomic. Contract rent is a mere matter of agreement between two 
parties, and it may or may not be equal in amount to economic 
rent. If I agree to pay Mr. X $100 a year for the use of his ten 
acres of land, the $100 is contract rent irrespective of the lo- 
cation or fertility of the ten acres. The principle developed 
in the discussion of market price applies in the matter of con- 
tract rent. The landowner, like the seller of goods, has a 
minimum rental value in his mind, while the prospective 
renter has a maximum value ; each bases his estimate on what 
he believes is the economic rent of the piece of land under con- 
sideration. As a result contract rent tends, in actual practice, 
to approximate economic rent. 

Source of agricultural economic rent. — Economic rent, un- 
like contract rent, cannot be determined by bargaining. Nor 
is it necessary that a piece of land be rented to a tenant in order 
that its economic rent may appear. The owner of a farm re- 

330 



RETURN TO LAND (RENT) 331 

ceives economic rent just as truly when he himself operates it 
as when he permits a tenant to operate it. 

The simplest approach to an understanding of economic rent 
is made by examining an ideal situation in which only a few 
persons are concerned. Let us assume, therefore, that ten 
families take up their residence on an isolated island composed, 
let us say first, of several different kinds of soil. Let us assume 
also that one of the families engages in wheat-farming on the land 
best adapted to wheat, while the other nine engage in fishing, 
manufacturing, or commerce, or even in some other kind of 
farming. Obviously, the wheat farmer can raise wheat 
cheaper than any other one — say 80 cents a bushel — for he has 
the best wheat land. As the number of people on the island 
increases, more wheat will be necessary and consequently more 
wheat land will need to be brought under cultivation. Neces- 
sarily the farmers that take up wheat-raising must resort to a 
poorer grade of wheat land than the first farmer possesses. 
But they will not grow Wheat even on free land unless the price 
of wheat is high enough to return to them interest on their 
capital and wages for their labor. We may expect under the 
increased demand for wheat that the price will rise, say to $L00 
a bushel. Under these new conditions the first wheat farmer, 
without having his expenses increased, will enjoy the increased 
price of 20 cents a bushel. If his land produces 40 bushels per 
acre it yields him an economic rent of $8 (40 times 20 cents) 
per acre. As population continues to increase, the extra de- 
mand for wheat forces its price upward. Farmers will then 
resort to the cultivation of poorer wheat lands, with the result 
that our first wheat farmer, also all the others except the one 
on the poorest piece of wheat land, will get an additional in- 
come which we call economic rent. We may say, therefore, 
that one of the sources of economic rent is the differences that 
exist in the fertility of soil. 



332 ELEMENTARY ECONOMICS 

We might have assumed that all of the land on our islands 
was of the same fertility. Suppose that nine of the ten families 
settle in a village, while the tenth family takes up the nearest 
piece of land for wheat-farming. Here again an increase in 
population will increase the demand for wheat with a corre- 
sponding increase in price. Consequently, other families will 
take up land for the purpose of growing wheat. This land, 
according to our assumption, is as well adapted to wheat-raising 
as the first farmer's land, but not so well located in reference to the 
village market. The second farmer, therefore, will be compeHed 
to undergo transportation expenses from which the first wheat 
farmer is free. Since the price of wheat is uniform in the village 
market, the first farmer will enjoy an advantage over the second 
farmer. Here is a second source of economic rent. A complete 
explanation of the sources of economic rent is beyond the scope 
of this book. We may say, however, that economic rent arises 
from differences ; in agriculture it arises chiefly from differences 
due to fertility and location. 

No-rent land. — We may assume, to continue our island illus- 
tration, that the ten families compete among themselves for the 
one fertile piece of wheat land to the point where the family 
which secures it merely gets return for the labor and capital 
employed in its cultivation. Under these circumstances this 
land, though it was the most fertile or the best located piece on 
the island, is no-rent land ; that is, it yields no rent either to 
its owner or to its cultivator. In Fig. 9 we see graphically the 
effect of increasing demands for wheat in our island settlement. 
When the settlement was first made the price of wheat was OL 
per bushel while the cost of raising it (interest and wages) was 
the same ; that is, it was produced on no-rent land. Just as 
soon, however, as an increased demand for wheat compelled the 
utilization of a poorer piece of land (poorer either in fertility or 
in location) for wheat-growing, the price per bushel was neces- 



RETURN TO LAND (RENT) 



333 



sarily raised. Otherwise, no one could afford to raise wheat on 
a poorer piece of land, for the cultivator of the best piece was 
merely getting a normal return on his capital and labor. The 
rise in price per bushel gave the wheat-grower on the best piece 
of land a surplus over his outlay in the form of wages and in- 
terest. This surplus we call economic rent. Its size is de- 
termined by the difference between his capital and labor costs 

y 




and the capital and labor costs of the second cultivator, who 
utilizes no-rent land. Let us suppose, further, that an increase 
in population causes five other pieces of land to be utilized at 
varying costs in the way of interest and wages (represented by 
the sohd vertical hues A, B, C, D, and E). Clearly, the price 
per bushel would have to be fixed at not less than E. Then 
the surplus per bushel (economic rent) going to our first farm 



334 ELEMENTARY ECONOMICS 

would be LQ ; to the next best piece, G (MQ) ; to the third, 
H (NQ) ; to the fourth, I (OQ) ; and to the fifth, J (PQ). 

Usually we think of differences in yield per acre rather than 
differences in the capital and labor costs per bushel. Let us 
suppose that five cultivators, each using exactly the same 
amount of labor and capital on equal-sized pieces of land, pro- 
duce the following numbers of bushels per acre : 40, 32, 30, 25, 
and 20. Since the fifth man will not farm without getting a 
return for his interest and wages, we may conclude that twenty 
bushels of wheat per acre equals in value the outlay of each 
farmer. Hence the economic rent of the five pieces, measured 
in bushels, is 20 (40-20), 12 (32-20), 10 (30-20), 5 (25-20), 
andO (20-20). 

77. Urban Rents 

Different kinds of urban sites. — We are now prepared to 
extend to urban rents, with some modification, the principles 
we have just learned. Obviously, fertility is not a factor in 
determining the selection of an urban site. Hence, location 
alone will claim our attention in this discussion. Urban sites 
might be divided into an infinitely large number of groups, but 
for our purpose two will suffice : residence sites and business 
sites. It is a matter of common knowledge that some store 
sites more than others are desired by merchants. Usually the 
determining factor in retailing is the size of the crowds that pass 
certain points during the day. A department-store owner has 
the option of utilizing a site near a busy down-town corner, or 
he may locate his stock of goods somewhere in the residence 
district, or even out in the desert, where land is free for the 
asking. We may say at once that if he is a wise merchant he 
will not try to operate his store in the residence district, cer- 
tainly not in a desert. Here we have the principle of site rent. 
The down-town business lot, like our best located farm on the 



RETURN TO LAND (RENT) 335 

island, enjoys the best location. For that reason it yields 
economic rent. Superior urban sites, like agricultural lands 
above no-rent land, yield economic rent though the owners them- 
selves utilize them. If the owner and the utilizer are different 
persons, the economic rent takes the form of contract rent. 
Otherwise it becomes a part of the utilizer's total income. 

The unearned increment. — Closely associated with economic 
rent is what is commonly called the unearned increment, which 
means the added value given to land by society and not by land- 
owners as such. For the sake of clearness we may confine our 
attention to urban sites, for it is there that social forces have 
had the greatest influence in raising land values. 

Our discussion of urban rents has paved the way for the state- 
ment that retail-store sites are determined largely by the habits 
of the consuming public. One block is better than another for 
certain kinds of retailing. Just why it is better is a matter to 
be determined in every individual case : perhaps it is the 
location of the courthouse, or of the post office, or of a popular 
theater. Whatever the reasons — important as they are in 
actual business practices — we need only to remember that 
equal-sized business sites produce unequal amounts of eco- 
nomic rent, and that these inequalities rest largely on forces 
usually independent of the owners of the sites. Twenty years 
ago, to cite an example, an eastern capitalist acquired a vacant 
business lot in the city of Denver for $10,000. In the mean- 
time his taxes and loss of interest on his investment totaled 
$17,000. Recently he sold the lot for $100,000, realizing over 
and above its entire cost to him the sum of $73,000. Not once 
in the twenty years did the capitahst visit Denver. Nor was 
it owing to any influence of his that the city grew, and that the 
people there acquired the habit of passing his vacant lot in 
great numbers. Yet without effort, and even without any show 
of foresight, for he had reluctantly taken the lot on an old debt, 



33G 



ELEMENTARY ECONOMICS 




1)11 I i:i;i:xT Itilizmion OF Similar Piecks ov Land. 
How did the erection of this hotel affect the value of adjacent sites? 



RETURN TO LAND (RENT) 



337 



he gained a small fortune. As one of his friends expressed it, 
he reaped where he did not sow. Single-taxers argue that all 
such increases in value should go to society and not to in- 
dividuals. These arguments are best expressed by the single- 
taxers themselves in a well-known pamphlet entitled A Single- 




No Man's Land. 

In almost every city is to be found a fringe of sites around the business 
center undesirable either for stores or for residences. 



Tax Catechism. The following three questions and answers 
indicate the nature of the catechism : 



Q. What is meant by the Single Tax? 

A. The payment of all public expenses from ground rent, the nor- 
mal revenue, thus eventually abolishing all taxes. 

Q. What is the ethical basis of the Single Tax? 

A. The common right of all citizens to profit by site values of land 
which are a creation of the community. 

Q. What is meant by the site value of land? 

A. The market value of situation irrespective of improvements. 



338 ELEMENTARY ECONOMICS 

Any discussion of the unearned increment is incomplete with- 
out some mention of a contrary movement known as the un- 
earned decrement. This concept can best be explained by 
reference to another concrete example. Several years ago a 
group of men built an apartment house in the city of Chicago 
on land then valued at $30,000. At that time the neighborhood 
was one of the best in the city. Shortly afterward several 
small store buildings were built near by. Then the elevated 
railroad was built down the middle of the street, and finally 
one of the large department stores built a warehouse on an 
adjoining lot. Desirable tenants could no longer be secured. 
The apartments were necessarily let to lower-income classes. 
The result was that the value of the ground declined from 
$30,000 to $15,000. Here was a loss inflicted on a small group 
of individuals by other individuals and by society at large. 
While no one believes that in the typical American city the 
decrement equals the increment, the fact must not be forgotten 
that a portion of the increment is offset by a decrement. 

78. Economic Rent and Price 

Economic rent does not enter into price. — The usual notion 
is that economic rent is one of the factors in setting price. This 
notion, however, is incorrect. Economic rent does not deter- 
mine price ; rather price is the chief factor in determining 
economic rent. It will be remembered that our island farmer 
who cultivated the best soil enjoyed a constantly increasing 
economic rent as the increasing demand for wheat forced the 
price upward. We assumed that his economic rent was twenty 
bushels of wheat per acre. Had his economic rent been thirty 
bushels instead of twenty it is not likely that the price of wheat 
would have been materially affected, for, as we have seen, the 
demand for wheat caused the price to be set at a point which 
would permit of the cultivation of the no-rent piece of land. 



RETURN TO LAND (RENT) 339 

When contract rent equals economic rent — the two always 
tend to approximate — the former likewise does not enter into 
price. Hence the retail store utilizing the best site can sell as 
cheaply, all other things being equal, as its competitor on a 
poorer location. It is a well-known fact that one of the large 
variety-store companies will not locate in a city unless it can 
secure a relatively high-rent site. Similarly, the high contract 
rents paid by tenants on the rich soil of Iowa or Illinois do not 
affect the prices of their products. 

Economic rent and agricultural values. — Those accustomed 
to buy and sell farm lands determine land values by fertility, 
location, and height of interest rate. Their first consideration 
is to ascertain the average yield of the piece of land they are 
trying to buy. Obviously, the more fertile the land the greater 
the yield. But this is not the only consideration. They must 
also estimate the cost of getting its product to market. An 
acre of corn land ten miles from an elevator, other things being 
equal, is less valuable than an acre nearer at hand. For in both 
cases the item of transportation cost must be taken into account. 
Finally, the value of a piece of land, or if we prefer, the value of 
its economic rent, depends also on the normal interest rate, for 
as the interest rate declines land values rise. Thus, a farm 
which would be considered to be worth $20,000 when the normal 
interest rate is 5 per cent, would be worth $25,000 if the interest 
rate should drop to 4 per cent. The methods employed to 
determine the value of a piece of unimproved land may be 
explained by the simple device as shown on page 340. 
First the economic rent is determined. Divide the rent by the 
normal rate of interest. The quotient is the value of the land. 

Economic rent and urban values. — Compared with agri- 
cultural lands the process of determining the value of urban 
sites is usually a more difficult matter. Farm products are 
tangible, easily measured, and have a well-known market price. 



340 



ELEMENTARY ECONOMICS 



Likewise the skill and ability ordinarily required to conduct 
farming operations are widely scattered among many persons. 
In the retail business, for example, the situation is different. 
The prospective buyer of a business site may feel safe in some 
cases in merely capitalizing the economic rent as represented 

Physical 
Property 



Capital 
Value 




Rent 



Interest Rate 

Fig. 10. 

by the contract rent of the tenant. More often he would 
exercise greater care in arriving at the value of the site under 
consideration. In other words, even where a business site has 
enjoyed a uniform rent for years, the determination of its value 
is a " hazardous occupation." 



RETURN TO LAND (RENT) 341 

Determination of the value of residence sites is still more 
difficult, for the utilities that flow from a home have an un- 
settled market price. The best step to take in trying to arrive 
at the value of such a site is to secure the opinion of a great 
many persons. Even if the site is improved and the prospective 
buyer expects to rent it, the opinion of disinterested parties is 
valuable, for after all it is to just such persons that he expects 
to rent the property. The market values of adjoining proper- 
ties are also a fair guide, particularly if they are being utilized 
by tenants ; for it is a safe assumption that the united judgments 
of many buyers and sellers are approximately correct. In any 
case, the ultimate value of the site must be determined by so- 
ciety, for the difference between this particular site and some 
other one is largely a social matter. 

EXERCISES AND PROBLEMS 



1. Distinguish between economic rent and commercial rent. 

2. Why is one piece of farm land preferred to another piece ? 

3. What factors determine this preference? 

4. What is no-rent land? 

5. Just how can a farmer afford to operate no-rent land ? 

6. How does a change in the price of wheat affect the economic 
rent of wheat lands? 

7. What effect has soil "butchery" on economic rent? 

8. Just how does improved means of transportation affect economic 
rent? 

9. How in general is economic rent affected by an increase in 
population ? 

10. How does custom and habit assist to determine the economic 
rent of store sites? 

11. What other factors are important? 

12. Explain what is meant by "unearned increment." 

13. What is the relation between this increment and the single tax? 

14. Distinguish clearly between an "increment" and a "decre- 
ment." 



342 ELEMENTARY ECONOMICS 

15. What is the relation between economic rent and price? 

16. Why does economic rent not enter into price ? 

17. Just how does the interest rate affect land values ? 



B 

1. Make a tour of inspection about your community. 

a. Notice the wide variations- in the utilization of business sites. 

b. Do these business sites yield more or less than equal-sized sites 

in the residence districts? 

c. Notice the sites which form a fringe about the business section. 

i. How are they utilized? 

ii. What about the improvements found there? 
iii. Do they seem to be in a state of transition f Explain. 

d. Contrast the various residence sections. 

i. What factors cause some sites to yield more economic rent 

than others? 
ii. Just how do these factors differ? 

e. Notice the number and location of vacant sites. 

i. Why are these not utilized? 

ii. Are there evidences of owners trying to secure unearned 
increments? 
/. Widen your definition of "urban economic rent." 

2. Suppose you were to become heir to a cultivated farm located in 
Patagonia. How would you determine its selling price? 

3. Inquire among business men and others concerning some instance 
of unearned increment. 

a. Determine as accurately as possible the size of the increment 

(difference between buying price and selling price). 
h. Estimate the interest on the investment at a fair rate. 

c. Subtract from the interest any income that may have been 

received. 

d. What portion of the increment appears to have been unearned f 

e. Is this portion more or less than it seemed to be when you 

began your examination ? 

4. Find an example of "decrement" in your community. 
a. What influences caused this decrement? 

6. Have you heard any one propose that society should com- 
pensate the owner for his loss ? Who ? 



RETURN TO LAND (RENT) 343 

5. If you were seeking a site for a cigar store, how would the location 
of the following influence you : 

a. Other cigar stores ? 

b. Dry goods stores? 

c. Restaurants ? 

d. Show houses? 

e. Garages ? 
/. Hotels? 

g. Soda fountains ? 
h. Drug stores? 
i. Railway depots? 

C 

!.■ A prominent United States senator once made the public state- 
ment that the high prices of farm products then prevailing were caused 
by high rents. 

a. Would you expect this statement to be criticized? Why? 

b. What fixes the price of any farm product ? 

c. What is the relation between the prices of farm products and 

the economic rent of the land on which they are grown ? 

2. Why does the contract rent of a piece of land often differ widely 
from its economic rent? 

3. How are the following likely to affect the economic rent of farm 
lands : 

a. Improved machinery? 

b. Discovery of new fertilizer? 

c. Improved methods in farming? 

d. Change in interest rate ? 

e. Automobiles ? 

4. A merchant located on the fringe of a business district often 
advertises that he can, owing to the low rent which he pays, sell goods 
cheaper than competing merchants nearer the business center. 

a. Why is his rent lower than theirs? 

b. Suppose he gets the business of his competitors. 

i. How will the economic rent of his site be affected? 
ii. How would this affect his contract rent ? 
iii. Would this claim of cheap rent continue to be valid? 
Explain. 

c. Does his lower rent permit him to undersell his competitors ? 



344 ELEMENTARY ECONOMICS 

5. Assuming that each piece of farm land yields its entire economic 
rent to its owner, why do tenants prefer one piece over another? 
Explain with some detail. 

6. Sometimes a retail merchant advertises that he can afford to 
undersell his competitors because he happens to own the store site 
which he utilizes. 

a. Does the land underneath his store building earn rent? 

Explain. 
h. Suppose a competitor who does not own his store building 
should invest the value of his site in railroad bonds, 
i. Would he be justified in advertising that he could undersell 

his competitors because he owned bonds? 
ii. How would the buying public regard such an advertise- 
ment? 
c. If he can afford to distribute his rent among his customers, 
why should he not also advertise that he can undersell his 
competitors because he owns his own capital or because his 
wife and children wait on his customers without pay? 

SUPPLEMENTARY READING 

Bullock, Introduction to the Study of Economics, 3d ed., pages 435-446. 

Ely, Outlines of Economics, 3d ed., pages 407-426. 

Fetter, Economics, Vol. I, pages 89-168. 

Johnson, Introduction to Economics, pages 215-231. 

Seager, Principles of Economics, pages 229-243. 

Seligman, Principles of Economics, 5th ed., pages 371-391. 

Taussig, Principles of Economics, 2d ed.. Vol. II, pages 55-106. 



CHAPTER XXV 

RETURN TO CAPITAL (INTEREST) 

79. Interest Peculiar to Modern Industry 

Attitude of the medieval church toward interest. ^ — ^The 
church fathers of the Middle Ages looked on the taking of inter- 
est as a sin. In assuming this position they were influenced no 
doubt by the fact that most loans were consumption loans — 
that is, loans contracted for the purpose of acquiring consumable 
goods. They did not believe that money was productive. 
Consequently, they declared that a debt was fully discharged 
when the borrower returned all that he had borrowed. Because 
of the refusal of the church to countenance the taking of in- 
terest, the money-lending business, as was noticed in an earlier 
connection, naturally fell into the hands of the Jews and the 
Lombards. Here no doubt is one of the chief causes of the 
bitter feeling that existed between the Jews and their Christian 
neighbors. The latter, regarding all interest as usury, looked 
on the Jews with contempt. Shakespeare clearly recognized 
the two divergent viewpoints when he made Shylock say in 
the Merchant of Venice : 

"Signior Antonio, many a time and oft 
In the Rialto you have rated me 
About my moneys and my usances :" 

To this Antonio, the merchant, answered : 

"If thou wilt lend this money, lend it not 
As to thy friends ; for when did friendship take 
A breed of barren metal of his friend? 
But lend it rather to thine enemy. 
Who, if he break, thou mayst with better face 
Exact the penalties." 

345 



346 ELEMENTARY ECONOMICS 

Rise of a money-lending class. — Despite the attitude of the 
medieval church many Christians loaned money. Especially 
widespread was the practice of moneyed men to evade the spirit 
of the law without violating its letter by becoming silent 
partners in trading enterprises. Gradually the attempt even 
to comply with the letter of the law was abandoned ; one by 
one the nations withdrew their support from this particular 
canon law. Then the church reluctantly bowed its head to the 
force of expediency. From that time, accumulations of wealth 
have more and more sought outlets to investments. Now 
numerous groups give their entire time to bringing lenders and 
borrowers together. We have seen already how important in 
this respect are the various kinds of bankers. Only a little less 
so are note brokers, real estate loan agencies, building and loan 
associations, and lawyers. 

So common is the phenomenon of borrowing and lending that 
scarcely one of us has ever given a thought of why interest can 
be paid, and how much the rate should be. Yet no subject in 
modern economics has created more discussion and debate. The 
ablest economists of the time have spent years on the why phase 
of interest, and have published monumental works to support 
their conclusions. This unsettled situation, however, need not 
deter us from glancing hastily at the question in its broadest 
aspects. 

80. Why Interest Is Paid and How Much 

The viewpoint of the borrower. — We have learned already 
that labor and land, when assisted by capital, produce more 
than when working alone. The best evidence of this fact is the 
tremendous volume of modern production compared with what 
we might expect to be produced if all capital were removed or if 
it had never existed. No one doubts that the sudden dis- 
appearance of capital from the face of the earth would in a 



RETURN TO CAPITAL (INTEREST) 



347 



short time result in the starvation of half of the human race. 
The borrower, then, since he knows from experience and 
observation that he can afford to pay a premium for the use of 
capital, is willing, if necessary, to bid up to the point of his 
expected gain. The wide variety of business enterprises 
combine with the different expectations of enterprisers, to make 
these independent bids cover a wide range which we may illus- 
trate as follows : 



y 



\ 


K 














\ 


L 


\^ 












\y 


V 


— 


A 


1 


? 


( 


: / 


) 


X 



Fm. 11. 



Borrower A is willing if necessary to go to AK (12 per cent) ; 
B, to BL (8 per cent) ; C, to CM (5 per cent) ; and D, to DN (4 
per cent). It should be noticed that the borrowers' curve is a 
demand curve. 



348 



ELEMENTARY ECONOMICS 



The viewpoint of the lender. — The lender also knows that 
capital is productive, but that in itself does not explain satis- 
factorily why he saves rather than spends his capital. Saving 
means abstinence for the ordinary individual, and, as we shall 
see, modern production bids for the savings of all regardless of 
wealth and income. Furthermore, it is a human characteristic 




H X 



that the normal man prefers present goods to future goods — ■ 
that is, present consumption to future consumption. This 
characteristic is most prominent among primitive peoples and 
among children. The American Indian seldom ever stored food 
for future consumption, though he was aware from experience 
that famine might be expected before the approaching winter 



RETURN TO CAPITAL (INTEREST) 349 

was over. Most boys and girls would rather eat their candy or 
cake today than to wait until tomorrow. Even older children 
often prefer to see a second-rate film today to a much better 
one next week. Even adults are not free from this form of im- 
patience, though as a general rule it is less prominent among 
them. Since most of us value present goods more highly than 
future goods, it follows that some inducement must be held out 
to us to cause us to postpone consumption — ■ that is, to ex- 
change present goods for future goods. This inducement we 
call interest. It is the price for waiting. Different people set 
different prices on the pain of waiting. Some demand a very 
high reward, some a more moderate one, a few have no prefer- 
ence, while occasionally we are able to find an individual that 
actually prefers future to present goods. We may arrange the 
various savers in the manner as shown on opposite page. 

Those to the left of Z will pay to be permitted to save, and 
those at Z will save without reward. As we move along the 
curve to the right of Z the price demanded for abstinence rises. 
E demands EP (4 per cent) ; F demands FQ (5 per cent) ; G 
demands GR (8 per cent) ; while H, who has the least desire to 
postpone consumption, demands HS (12 per cent). 

Fixing the current interest rate. — We may now inquire how 
the current rate of interest is fixed. Since the borrowers are 
really buyers of capital and the lenders sellers of capital we can 
apply the principle developed in the chapter on determining the 
market price of goods. Like buyers of goods, borrowers have a 
maximum price (interest rate) in mind ; and lenders, like 
sellers, consider only a minimum price (interest rate) . Borrower 
A, to revert to Fig. 11, is willing to go as high as 12 per cent but 
no higher. Borrower B will go no higher than 8 per cent, while 
borrowers C and D have in mind a maximum rate of 5 and 4 
per cent, respectively. Lender H must have at least 12 per 
cent ; lender G, 8 per cent ; lender F, 5 per cent ; and lender 



350 



ELEMENTARY ECONOMICS 



E, 4 per cent. Obviously, any one of the lenders would be 
willing to supply, to the extent of his lending capital, the 
wants of borrower A. But A, eager to pursue his own economic 
advantage, quickly sees, since he does not desire all the capital 
available, that some of the lenders have a minimum rate far 
below his maximum. Also those with lower minimum rates 
will not permit any one of their number to secure A's maximum 
rate at the expense of leaving their savings uninvested. Thus 
from the opposing forces there emerges an interest rate which 
will permit the largest amount of money to be loaned. This 
we call the current rate, and its location may be illustrated as 
follows : 




Fig. 13. 



RETURN TO CAPITAL (INTEREST) 351 

81. Variations in the Interest Rate 

The risk element. — So far in our discussion of the interest 
question we have considered only pure interest, and the current 
rate of pure interest. We may now examine some of the forces 
that cause (1) the current rate of contract interest to be above 
the current rate of pure interest, and (2) variations in rates of 
contract interest. Risk is the chief cause for the difference 
between pure interest and contract interest. No debt, we may 
say, is absolutely sure to be paid, though in the case of United 
States bonds uncertainty is reduced to a minimum. Risk in- 
creases rate. Government obhgations bear a relatively low 
rate of 3 or 4 per cent ; railroad bonds, 5 per cent ; ordinary 
bank paper (promissory notes) , 6 or 7 per cent ; while collateral 
loans made by pawn shops often bear a rate of 30 or 40 per cent. 
A portion of the interest income, therefore, represents risk. 

Fixity of investment. — Some loans or investments are pre- 
ferred to others even where there is the same element of risk in- 
volved. A railroad bond, for example, usually bears a lower rate 
of interest than a first-class farm mortgage. Here the risk 
element is very low, but bonds are much easier sold than are 
mortgages ; hence the difference in rates. Banks also vary 
rates of interest paid on deposits according to the degree of 
fixity. City banks often pay 2 per cent on checking deposits 
and 3 per cent on savings. Depositors may withdraw the former 
on demand, while in the latter case the bank has the right to 
compel formal notice of several days. Likewise in lending 
money, banks usually charge less interest on a call loan than 
on a time loan. One they can have paid on demand ; for the 
other they must wait until it is due. Thus we see that the lender 
who reserves the right to have his loan returned to him quickly 
must accept a less reward for his waiting than would be necessary 
if he were willing to forego this reservation. Also the borrower 



352 ELEMENTARY ECONOMICS 

is unwilling to pay as much premium for capital over which he 
has an uncertain control as he would pay if his control were made 
more certain. 

Variations among industries. — It often happens that a cer- 
tain industry is prosperous above the average. Usually, under 
these circumstances, enterprisers, eager to enlarge their busi- 
ness, pay a higher interest rate than is current at the time. 
Other enterprisers seeing the prosperity of this particular in- 
dustry will quietly enter the field and bid high for capital. As 
a result there is some variation in the interest rates among 
different industries. 

Variations among localities. — In a large country like the 
United States there is a wide variation in the interest rate. 
Even the states recognize this fact in their usury laws. Some 
restrict the legal rate of interest to 6 per cent, some to 7 per 
cent, while others permit as high a rate as 10 per cent. Three 
closely related causes account for this variation : (1) relative 
scarcity of capital, (2) cost of supervising loans, (3) lack of 
information on the part of lenders. 

In the newer sections of the country, capital is scarce. Yet 
it is there that capital can usually be used to the best advantage 
in improving farms, in building cities, and in starting manu- 
factures. Naturally, enterprisers bid high for the scanty stock. 
The question may very properly be raised, however : Why does 
not the capital of older sections flow to these regions of high 
interest rates? First of all, there is a greater degree of un- 
certainty connected with the industries here than would be the 
case if they were being carried on in the older settled regions. 
For that reason a lender hesitates to loan his funds, especially 
if he is not in a position to supervise them to the extent of 
protecting his own interests. The next best thing he can do is 
to send them to some bank or mortgage concern in the newly 
settled section with instructions to loan them to the best 



RETURN TO CAPITAL (INTEREST) 353 

advantage. Granted that the security offered is ample, yet 
there has been some cost in handHng the funds, which will 
appear in the form of higher interest rates. Finally, the lender, 
unless he is in a particularly good position to get information, 
is likely to know little about either the borrower or the banker. 
Hence he prefers to loan his funds nearer home even at a lower 
rate. 

EXERCISES AND PROBLEMS 
A 

1. Just why did the medieval church oppose the taking of interest ? 

2. What is the difference between a consumption loan and a pro- 
duction loan ? 

3. In the conversation between Shylock and the merchant Antonio, 
what is the significance of the following expressions: "usances"? 
"barren metal"? "exact the penalties"? 

4. Just how was a silent partner able to loan money without evad- 
ing the law ? 

5. What are the two aspects of interest ? 

6. Why will borrowers pay interest on loans? 

7. Why must lenders be rewarded? 

8. What determines the maximum interest rate a borrower will 
pay? 

9. What is the lowest interest rate which a lender will accept? 

10. Just why are present goods usually valued more highly than 
future goods? 

11. Is saving painful ? Explain. 

12. Why should the legal interest rate be higher in Wyoming than in 
Massachusetts ? 

13. What is a "call loan"? 

14. Why do lenders prefer a call loan to a time loan? 

15. Why is the interest rate on bonds usually lower than the div- 
idends on stocks of the same concern? 

16. Why is a railroad bond more negotiable than a farm mortgage ? 

17. What kind of real estate mortgages resemble bonds? 

18. Where is the best market for real estate mortgages usually found? 

19. Why are real estate mortgages usually recorded? 



354 ELEMENTARY ECONOMICS 

B 

1. Put the following questions to some friendly business man: 
"Why are you willing to pay interest on borrowed money? " "Would 
you be willing, rather than to do without, to pay a higher rate than you 
now pay?" "How would an increase in the current interest rate 
be likely to affect your business?" 

2. Examine any metropolitan newspaper for quotations on New 
York interest rates. 

a. Name the various kinds of loans found. 

b. Which bears the higher interest rate? 

c. Consult some banker regarding the New York interest rate, 
i. Inquire about the nature of a demand loan. 

ii. Ask him to explain why the rate on commercial loans varies 
but slightly. 

d. Compare these quotations with quotations found in older 

newspapers. 

3. Call to mind instances when present goods commanded a very 
high premium over future goods ; when future goods were more greatly 
desired than present goods. 

4. Name five forms of investment with which you are familiar. 

a. Which bears the highest interest rate? the lowest? 

b. To what extent does risk cause the difference? 

5. Inquire of some banker concerning the opportunities of banks in 
the older states to loan money in the newer regions. 

C 

1. Aristotle spoke of money as being barren, and hence incapable of 
producing interest. 

a. Do enterprisers borrow money, or is it, in the long run, equip- 

ment for producing goods? 

b. What assurance has an enterpriser that his borrowed equip- 

ment will reproduce itself and something over in the way 
of interest? 

2. Suppose it should become generally known that excessive profits 
are being made in the manufacture of shoes. 

a. How would this knowledge affect enterprisers in other lines? 

b. What would be the effect on the production of shoes ? 

c. Would the prices of shoes rise or fall ? Why ? 



RETURN TO CAPITAL (INTEREST) 355 

d. How would this change affect the profits of shoe-manu- 
facturers ? 

3. Discuss the desirability of a state legislature fixing a legal rate 
of interest above which the law provides a penalty for going. 

4. As a result of an insistent demand the government established 
in 1916 a farm loan bank which furnishes farmers money at a moderate 
rate of interest. 

a. From which sections of the country would you expect the 

demand to have been the strongest? Why? 

b. How did the bankers regard this new bank? 

c. Has it succeeded to an extent in equalizing the interest rate 

over the whole country? 

5. The "sacrifice" theory of interest is often criticized on the 
ground that such men as Rockefeller and Morgan make no sacrifices 
in abstaining from consuming their wealth. 

a. Can wealthy men like these save all the capital needed ? 

b. Which savers exert the greatest influence in fixing the interest 

rate? 

c. Do these savers sacrifice ? Explain. 

SUPPLEMENTARY READING 

Bullock, Introduction to the Study of Economics, 3d ed., pages 423-435. 

Ely, Outlines of Economics, 3d ed., pages 493-524. 

Fetter, Economics, Vol. I, pages 235-313. 

Fisher, Elementary Principles of Economics, pages 410-432. 

Johnson, Introduction to Economics, pages 217-231. 

Seager, Principles of Economics, pages 262-282. 

Seligman, Principles of Economics, 5th ed., pages 313-328. 

Taussig, Principles of Economics, 2d ed.. Vol. II, pages 3-43. 



CHAPTER XXVI 

RETURN TO THE BUSINESS MAN (COMPETITIVE 
PROFITS) 

82. Place of the Business Man in Industry 

The business man combines the factors of production. — 
Hitherto we have discussed the place of land, labor, and capital 
in production, and the share of distribution going to each, as if 
these factors were guided in their work by internal forces. 
Both land and capital are stone blind. Workers, too, need 
direction^ Some one must anticipate probable demands, 
determine the relative amount of each factor to employ in 
production, and provide for supplies of raw materials. In other 
v/ords, there is a productive function apart from land, labor, 
and capital. Consequently, there has developed in modern 
industrial society a group of men who devote their time and 
abilities to performing this function. Such men we call enter- 
prisers. Every business man, in fact, no matter how large or 
how small his operation, is necessarily an enterpriser. 

Responsibility of the business man. — Since it is the func- 
tion of the enterpriser to combine land, labor, and capital in 
such a way as to make them productive, .it naturally follows 
that he must assume all of the risks involved in his undertaking. 
Modern practices require him to enter into binding contracts 
for the factors of production before he has prepared a single 
unit of his goods for the market. One about to undertake the 
manufacture of cloth, for example, must rent or purchase a 

356 



RETURN TO THE BUSINESS MAN 357 

site for his plant, must construct factory buildings, and finally 
he must agree with cloth-weavers to pay them certain wages. 
The farmer has similar experiences. He buys or rents land, 
prepares the soil for seeding, plants, and cultivates. He may or 
he may not reap crops sufficiently valuable to pay for the costs 
involved. Whether or not he does, is no concern of land, labor, 
and capital ; that is, each of these factors is protected by a 
binding contract with the enterpriser. Every enterpriser must 
take these risks ; otherwise enterprisers would not be enter- 
prisers. The importance of risk-taking is overlooked by many, 
who, blinded by the brilliant successes of some enterprisers, 
assume or pretend to assume that the typical business man's 
reward in the form of profits is always unjustified. Herein 
lies the weakness of any system that would eliminate the enter- 
priser from industry. 

Characteristics of the business man. — The business man of 
this country possesses certain characteristics which we may 
examine at this point. First of all, the typical American enter- 
priser is daring ; so daring in fact, that foreign observers have 
said that he would be willing, if necessary, to pay to be allowed 
to assume business risks. Overdrawn as this statement is, it 
points to a significant tendency. Not only is he daring, but he 
is resourceful. Like a good soldier he watches every movement 
of those opposed to him, takes advantage of every opportunity, 
and uses his own forces to the best advantage. In short, 
he often accomplishes the impossible. Moreover, the typical 
American enterpriser is imaginative. Particularly among our 
captains of industry do we find this characteristic well developed. 
On no other ground can we explain the numerous trans-, 
continental railroads, the irrigation projects of the Southwest, 
the great steel mills at Gary, Indiana, and Bethlehem, Penn- 
sylvania, and the Panama Canal. Such projects do not result 
from accident ; they must mature in the mind before they 



358 ELEMENTARY ECONOMICS 

become realities. James J. Hill owed much of his success as a 
master railroad-builder to a highly developed imaginative 
ability. In a more modest way the pioneer farmers of the West 
and Middle West saw in the future the long stretches of timber 
land and the trackless prairies give way to prosperous farming 
communities. They not only saw, but they also dared to make 
the " great venture," to pit their resourcefulness against the 
hostility of an unsettled country. 

Source of the business man's characteristics. — Enter- 
prisers, in common with all other members of the human race, 
get their business characteristics from two sources : (1) heredity, 
(2) education. Some are especially endowed by nature ; some 
acquire success as enterprisers, by long hours of study and 
application ; a few combine both characteristics to a high degree. 
It is safe to say, however, that the typical business man — 
farmer, merchant, manufacturer — is fairly well born and 
fairly well trained ; that is, he can attribute his economic suc- 
cess partly to his ancestors and partly to his own efforts. What 
he lacks in heredity he may usually make up in education. 
Which of these two forces is the more important? At the risk 
of starting a fruitless discussion we may say with some assurance 
that heredity asserts itself especially strong during the earlier 
years of business, while education and training (experience) 
necessarily exert themselves at a later date. The importance 
of the sources of business characteristics becomes significant 
when we try to account for the place of the enterpriser in 
industry. We know what he does, but we must also know why 
society rewards him for his services. If he is created of finer 
clay than most men, then, so far as his share in distribution is 
concerned, he resembles land. If he succeeds by study and 
training then he resembles labor. In either case, his reward 
is a differential — that is, it depends on his superiority over the 
margin. 



RETURN TO THE BUSINESS MAN 359 

83. The Nature and Source of Profits 

Profits are residual. — With tlie place of the business 'man 
estabhshed in modern industry, we may now turn to the nature 
and source of the distributive share which goes to him for his 
services. 

The enterpriser, we have seen, enters into a contract to pay 
definite amounts to land, labor, and capital for assisting him in 
his enterprise. Eventually, when the product is sold, the 
enterpriser is in a position for the first time to strike a balance 
between what he has paid out and what he has received. If the\ 
latter exceeds the former we say that he has made a profit.' 
Otherwise, unless the two items are exactly the same, which is 
unlikely, we say that he has made a negative profit — that is, 
suffered a loss. Obviously, then, pro fits^are, ^residual. They 
are what is left over after all other snares in distribution have 
^een paid. They stand exposed to every fluctuation in the 
size of the payments for raw materials and to the three factors 
of production. 

Guarding against price fluctuation. — In the last sentence 
above we have the key to the source of profits, ^ri^efluctua^ 
tions — in wages, interest, rent, raw materials, and finished 
products — are at the bottom of all profits or losses. If the\ 
prices of everything entering into the product of any particular \ 
enterprise were absolutely fixed, and the price of the finished j 
product itself known in advance, there would be little room iox/' 
_grofits. Usually there is no way to guard against price fluctua- 
tion, and it is not certain that enterprisers in general would wel- 
come any change that might threaten the existence of their 
profits. Often a house-builder, when he agrees to erect a struc- 
ture at a certain price, protects himself by contracting at the 
same time for the building material to be used in its con- 
struction. Clothing manufacturers, also, when they sell men's 



360 



ELEMENTARY ECONOMICS 



suits for future deliver}^ often base their prices on a previously 
arranged price for cloth. 

The highest development in this respect has been m the flour 
industr3\ To protect themselves from possible loss, millers 
usually are willing to forego possible gains by buying wheat for 




Courtesy of Mr. Leslie F. Gates, Chicago. 

Scene on the Chicago Board of Trade. 



future delivery. We can best understand how this is done if we 
consider a concrete case. IMiller A is asked in December to 
make a price on flour to be delivered in June. Not wishing to 
take chances he looks up the quotation of May wheat and finds, 
let us say, that it is SI. 00 per bushel. With this information 
he can as easily fix the price of flour to be delivered in June as 
he could if he were selling out of his present supply. Miller A 



RETURN TO THE BUSINESS MAN 361 

then buys on the Board of Trade at $1.00 a bushel enough May 
wheat to fill his flour contract. Let us suppose that when the 
time for the dehvery of the wheat has arrived (May) the market 
price is 99 cents a bushel instead of $1.00. Miller A can compel 
delivery at the contract price, which is $1.00. Or he can, if it is 
possible, buy his wheat in the local market at 99 cents and 
sell out his Board of Trade contract at one cent per bushel loss. 
Suppose, however, that the market price in May was $1.01 
instead of 99 cents. In that case he could compel delivery 
of wheat at $1.00 a bushel, or go into the local market and buy 
it at $1.01, selUng out his Board of Trade contract at one cent 
per bushel profit. The important thing to notice is that our 
miller has protected himself from fluctuation in the price of 
wheat, preferring security to possible profit. In any case his 
wheat costs him $1.00 a bushel irrespective of the market 
price. This illustration is stripped of the numerous complica- 
tions which arise in such transactions, but it contains in es- 
sence the principle of what we may call industrial insurance — 
that is, insurance against loss by price fluctuation. 

Competitive profits resemble rent. — There is one striking 
similarity between profits and rent. Rent, as we have seen, is a 
differential ; that is, it arises from differences in fertility or 
location. Profits likewise owe their existence to differences. 
The best enterpriser, like the best farm land, produces abun- 
dantly ; and like the best farm land he cannot produce enough 
for all. Consequently, society is compelled to resort to poorer 
enterprisers just as it is to poorer lands. But the costs of 
production of poorer enterprisers are higher than for better 
enterprisers in the same industry, and they must get a return 
equal to what they have paid for the use of land, labor, and 
capital, in addition to their own wages. In other words, the 
poorest enterpriser in any industry tends to set the price of its 
product, while all other enterprisers in the same industry enjoy 



362 



ELEMENTARY ECONOMICS 



a reward, called profits, for their superior skill. As a result, 
profits, like rent, do not enter into price. Price fixes profits; 
profits do not fix price. Figure 14 illustrates this point. Society- 
demands the services of four enterprisers, A, B, C, and D, in a 
certain industry. A's cost of producing one unit of the product 




Fig. 14. 



is AL ; B's cost is BM ; C's cost is CN ; and D's cost is DR. 
Clearly, the market price cannot be less than DR. Conse- 
quently, on each unit A will enjoy a profit of LS ; B, of MT ; 
and C, of NO. If A's profit were WS instead of LS the 
price of the product would not be materially affected, for 
the price DR is still necessary to keep D in business. 



RETURN TO THE BUSINESS MAN 363 

Competitive profits tend to disappear. — The fact that 
A, B, and C, in the illustration above, enjoy profits, will cause 
them to enlarge their operations in order to increase their profits 
by increasing their output. The demand for this particular 
product can ordinarily be increased only by lowering the price. 
But a lower price means less profit per unit. D, let us say, will 
be driven from business and C will become the marginal pro- 
ducer. Obviously, the unit profits of all will fall and it is likely 
that both A and B as well as C will suffer a decline in total 
profits. As competition increases, prices will continue to fall 
until, we are safe in saying, profits will tend to disappear. 
To put the same thought in different language, competitive 
profits are always in the process of extinction. This tendency is 
the basis for the trite saying, "' Competition is the life of trade." 

84. Cooperation and Profits 

General attitude toward profits. — Most of us regard profits 
as something entirely different from rent, wages, or interest. 
When a friendly manufacturer says that he will sell us one of his 
products at cost we assume at once, and correctly so, that he has 
in mind merely to forego his profits. Why should he not also 
share with us a portion of his income arising from his land or 
capital? One is just as legitimately his as the other. In any 
case his total income is decreased by just so much. We would 
not expect a laborer to donate us an hour's work ; nor a capital- 
ist, the use of a hundred dollars for a month's time ; nor a land- 
owner, the use of a piece of his land. Why then are we not 
surprised when some one offers to make a gift of his profits? 
The difference lies no doubt in the fact that profits are not 
salable, that the sacrifice made to get them is not so noticeable, 
and that they are residual. Whatever the reason for its exist- 
ence, the general notion prevails that profits can be eliminated 
easier than rent, wages, or interest. 



364 ELEMENTARY ECONOMICS 

Cooperation aims to eliminate profits. — The most ambitious 
attempts to eliminate profits have taken the form of coop- 
eration. Everywhere groups are planning how to carry on this 
or that kind of industry without the assistance of professional 
enterprisers. Farmers organize cooperative grain elevators, 
creameries, and threshing " rings " ; merchants combine to 
purchase goods in larger quantities ; while consumers pool their 
buying ability in order to deal directly with jobbers, whole- 
salers, or manufacturers. Does the elimination of the pro- 
fessional enterpriser eliminate profits? If the farmers of a 
certain community can manage a grain elevator so successfully 
as to show a residual element at the end of the year, they have 
earned a profit. Perhaps it is returned to them the next year 
in the form of increased price or of decreased storage charges, 
yet that does not alter the fact (1) that it is profits, and (2) that 
it arose as a, result of their skill as enterprisers. They have 
eliminated the enterpriser without eliminating his reward. In 
other words, our group of farmers has assumed the risks of the 
business and is entitled to any residual element that may 
arise. 

Basis of successful cooperation. — Since competition tends 
to eliminate profits, and since the profits of any particular 
enterpriser are likely to come from a relatively large number of 
individuals, the saving to any one individual by the elimination 
of the enterpriser is usually small. As a consequence, co- 
operation is ordinarily possible only by people who are willing 
to exert themselves in order to effect petty savings. Gen- 
erations of self-denial have accustomed the working classes of 
England to give careful attention to their purchases of food and 
clothing. In this country, on the contrary, we have always 
looked on petty savings as something akin to parsimony, and 
hence to be carefully avoided. Here we have the reason for 
their general failure in this country. The typical American 



RETURN TO THE BUSINESS MAN 365 

housewife, even among the ranks of unskilled labor, has not 
yet learned the difference between nine cents and ten cents, 
though this difference if spread out over the average family 
expenditures of this group for a year would aggregate forty or 
fifty dollars. Cooperation is also likely to be hampered in those 
localities or countries in which enterprisers are especially skilled. 
The European retailer is compelled to get excessive profits to 
cover losses caused by his slow-paying customers of the upper 
classes. Here such compulsion is neither necessary nor justi- 
fiable ; merchants do not strive for certain customers, as they are 
likely to do in Europe, in order to gain respectability. Occa- 
sionally cooperation is undertaken to break a monopolistic hold 
on some industry. Fruit-growers, for example, have found it 
necessary in some sections of the country to market their own 
products in order to keep from being literally robbed. 

Success of cooperation in various industries. — Coopera- 
tion is, by its very nature, more successful in some industries 
than in others. Retailing appears to offer the best opportunity : 
a relatively small amount of capital is required; no great 
amount of enterprising skill is necessary ; and those interested 
come in contact with it daily. Cooperative manufacturing, 
however, is a more serious matter. Here must be settled im- 
portant questions, such as the hiring of labor, changing the 
character of the product, and seeking new markets. To 
answer these questions successfully the hired manager must 
have such skill and ability as to attract the attention of com- 
peting manufacturers, who would either get him away or force 
the cooperative concern to raise his wages to a point where 
profits would be endangered. Moreover, the risks involved in 
retailing are comparatively small, so that the members of the 
association can very well afford to carry them. The largest of 
the English retail cooperative societies — the Rochdale Stores — 
has not attempted to establish its manufacturing business on a 



366 ELEMENTARY ECONOMICS 

cooperative basis, largely because of the impracticability of the 

scheme. 

EXERCISES AND PROBLEMS 

A 

1. Why are profits a share in distribution? 

2. What is the chief function of the enterpriser? 

3. Just why are profits residual? 

4. Characterize the typical American enterpriser. 

5. Why in the successful conduct of a business is imagination as 
important as skill? 

6. In what way does enterprising skill resemble land? labor? 

7. Should enterprisers be guaranteed a profit by society ? Explain. 

8. What is the source of profits ? 

9. How may an enterpriser protect himself against risk? 

10. How does this protection affect profits and losses? 

11. In what way do profits resemble rent? 

12. What is the relation between profits and prices ? 

13. Why do competitive profits tend to disappear? 

14. How are profits related to cooperative schemes? 

15. Why has cooperation usually failed in the United States? 

B 

1. Many business men, farmers in particular, call their entire net 
income profits. Interview some retail merchant that owns his own 
store building. 

a. How much does he set aside each year as rent? 

b. What amount of interest does his capital earn? 

c. What portion of his income does he attribute to his own wages ? 

d. What is the government's share in the way of taxation? 

2. Call to mind a successful enterpriser in your community, 
o. What are his most outstanding business characteristics? 
b. Does he give attention to details? 

3. Question a retail merchant concerning advertised sales in which 
goods are offered at cost. 

o. What does he understand by "cost" in this connection? 

b. Does he always use the word "cost" in exactly the same way? 

c. What variety of meanings may the word have? 

d. Analyze your own notion of its meaning. 



RETURN TO THE BUSINESS MAN 367 

4. Examine, if possible, any attempts that have been made in your 
community to eliminate profits through cooperation. 

a. What was the nature of these attempts? 

b. Did any one oppose them? Who? 

c. How well did they succeed? 

C 

1. Explain in each case why the following are, or are not, enter- 
prisers : 

a. Farmers. e. Professional beggars. 

b. Bankers. /. Railroad engineers. 

c. Scissors-grinders. g. Factory managers. 

d. Gamblers. h. Taxi-drivers. 

2. Give reasons why American enterprisers should be more daring 
than their European competitors. 

3. Explain just how the profits of a cotton-cloth manufacturer 
may be affected by the following : 

a. New inventions and discoveries in spinning, weaving, dyeing. 

b. Increase or decrease in the ravages of the boll weevil. 

c. Changes in style of clothing. 

d. Production of wool, flax, and silk. 

e. Changes in the current rate of wages for farm labor, railroad 

men, weavers. 
/. Changes in the current interest rate. 

4. Recently a convention composed of wheat-growers declared that 
the low price of wheat then prevailing was caused by speculation on the 
Chicago Board of Trade. On the same day a body of millers assembled 
in a near-by city made the claim that speculation in wheat caused 
wheat prices to be too high. Discuss. 

5. Sometimes a miller is found who refuses to have any dealings 
with a wheat exchange on the ground that to do so would be speculation. 

a. Can a miller trade in wheat without speculating ? How? 

6. Can a miller who sells flour for future delivery avoid specula- 
tion if he refuses to buy wheat for delivery at the same time ? 
Explain. 

c. Are millers more than other people likely to become wheat 
speculators ? 



368 ELEMENTARY ECONOMICS 

SUPPLEMENTARY READING 

Bullock, Introduction to the Study of Economics, 3d ed., pages 460-467. 
Ely, Outlines of Economics, 3d ed., pages 525-541. 
Fetter, Economics, Vol. I, pages 317-381. 
Seager, Principles of Economics, pages 198-212. 
Seligman, Principles of Economics, 5th ed., pages 351-370. 
Taussig, Principles of Economics, 2d ed., Vol. II, pages 158-191. 



CHAPTER XXVII 
SOCIALISM 

85. Nature and Purposes of Socialism 

What is socialism ? — The spread of socialism throughout 
the world during the past generation, with its doctrines and 
claims so out of harmony with the established order of things, is 
the most striking social phenomenon of the time. Socialism is 
claiming the attention of many of the most thoughtful people, 
though giving their attention to the movement does not imply 
that they are giving it their support. They believe, however, 
that sooner or later the socialistic question must be decided 
one way or another ; and for that reason they, as members of 
society, desire to act as intelligently as possible when that time 
comes. As students of economic questions we too should learn 
something about the demands of socialism, its program of 
action, the arguments of its supporters, and finally about the 
social conditions out of which it has grown. 

Socialism, in brief, is a program which calls for the social- 
ization of the instruments of production ; that is, a program 
which demands that the state alone shall own the instruments of 
production. Under socialism there would be no professional 
enterprisers and no capitalists. Some socialists would also 
abolish private property in land, though this doctrine is not 
now universally held. Since there are to be neither enterprisers 
nor capitalists, it naturally follows that under socialism the 
shares that now emerge in the form of profits and interest would 
go to the workers in the form of increased wages. For that 

369 



370 ELEMENTARY ECONOMICS 

reason socialism is best treated as a problem of distribution, 
though by its very nature the first changes in a state passing 
to socialism would be made in production. We must exercise 
care in this connection to rid our minds of the common fallacy 
that socialism means a redistribution of property so that all 
the members of society may have exactly the same amount of 
wealth. Unfortunately, some of the more radical socialists 
themselves have created this wrong impression by their in- 
temperate assertions. 

The abolition of profits and interest, and perhaps of rent, 
does not imply that all of the members of a socialistic state are 
to be equally wealthy. It merely means that there will be no 
opportunity for investment, and no opportunity to serve as 
a private enterpriser. Wealth may be accumulated and in- 
herited, and enterprising skill may be utilized by the state and 
rewarded accordingly. Under socialism no great leisure class will 
be possible ; that is, every one will labor. Tasks will be appor- 
tioned according to strength and ability and rewarded accord- 
ing to need. Socialists lay the blame for our industrial ills, 
such as unemployment and crises, to the present system of 
industry. They insist that in a socialist state everybody will be 
employed ; and that production will be nicely adjusted to need. 

Basis of socialism. — The socialists themselves claim that 
the system of private industry has broken down ; that labor is 
being exploited to pay profits and interest ; and that there is no 
prospect of better things unless the state goes over to socialism. 
The most bitter opponents of socialism dare not contend that all 
of its friends are crazy or even cranks. There must be, then, 
some basis for the socialistic movement which we see on every 
side. There is no denying, as we have seen in a previous 
chapter, that inequalities of income and wealth are glaring. 
Just why one man should be able to amass a fortune of a half 
billion dollars while millions are propertyless cannot be ex- 



SOCIALISM 371 

plained on the ground either of foresight or of thrift. Is it 
any wonder, then, that men of all walks of life are giving careful 
attention to every proposal that has for its end a more healthy 
condition of industrial society? 

Different socialistic programs. — As is to be expected, 
different men have arrived at different conclusions regarding 
the socialistic program which the state ought to undertake. 
We may in this connection notice four different groups of 
socialists : (1) Utopian socialists, (2) Fabian socialists, (3) 
Christian socialists, and (4) Marxian socialists. 

The first of these groups, called the Utopists, was confined 
to France, England, and the United States. Among its mem- 
ber were included two Frenchmen, Saint-Simon and Charles 
Fourier. One of the most prominent Englishmen in this group 
was Robert Owen, founder of a communistic settlement at New 
Harmony, Indiana. In this country one of the best-known dis- 
ciples of Fourier was Horace Greeley, editor of the New York 
Tribune. These men had high ideals, and they made painful 
sacrifices in an effort to change them into actualities. The 
Fabian socialists are Englishmen. They believe that socialism 
will come "\Yhen the people are once awake to its merits. To 
hasten this day the Fabian society of England offers prizes for 
essays and other papers dealing with socialism, which they print 
for general distribution. The group of Christian socialists lay 
great stress on the necessity of society following the doctrines 
of the early Christians, who, they contend, shared their posses- 
sions in common. One of the outstanding figures of the group 
was Charles Kingsley, a noted English preacher and the author 
of Westward Ho! and Hypatia. 

More important for our discussion are the Marxian socialists. 
The chief figure of this group was Karl Marx (b. 1818 ; d. 
1883), whose monumental work, entitled Capital (Das Kapital), 
is aptly called the bible of modern socialism. In this work one 



372 ELEMENTARY ECONOMICS 

Declaration of Karl Marx and His Friends, 1848. 

THE COMMUNIST MANIFESTO. 

CHAPTER I. 

BOUEGEOISIE AND PROLE TAEIAT. 

1 HE history of society in the past is the history of class 
struggles. Freemen and slaves, patricians and plebians, nobles 
and serfs, guild members and journeymen — in short, oppressors 
and oppressed, have always stood in direct opposition to each 
other. The struggle between them has sometimes been open, 
sometimes concealed, but always continuous. A never ceasing 
struggle, which has invariably ended, either in a revolutionary 
alteration of the social system, or in the comajon destruction of 
the contending classes. 

In earlier historical epochs we find almost everywhere a 
minute division of society into classes or castes — a variety of 
grades in social life. lu Ancient Rome we find patricians, 
knights, plebians, slaves; in Medieval Europe, feudal lords, 
vassals, burghers, journeymen, serfs; and in each of these classes 
here were again grades and distinctions. 

Modern bourgeois society which arose from the ruins of the 
ieudal system has not wiped out the antagonism of classes. 
New classes, new conditions of oppression, new modes and forms 
of carrying on the struggle, have been substituted for the old 
ones. The charateristic of our epoch — the epoch of the bourgeoisie, 
or middle class — is that the struggle between the various social 
classes has been reduced to its simplest form. Society tends more 
and more to be divided into two great hostile classes — the 
Bourgeoisie and the Proletariat. 

From the serfs of the middle ages sprang the burgesses of 
the early Communes; and from this municipal class were devel- 
oped the first elements of the Bourgeoisie. The discovery of 
America, the circumnavigation of Africa, gave the bourgeoisie 
or middle class — then coming into being — new and wider fields 
of action The colonization ot America, the opening up of the 
East Indian and Chinese markets, the colonial trade, the increase 



SOCIALISM 373 

may find the claims of socialism ably set forth and ably defended. 
Two of them we may properly examine at this point. (1) 
Marx insisted that laborers produced much more than they re- 
ceived in the form of wages. This excess he called surplus value. 
What he really meant was that the two shares in distribution, 
profits and interest, were really portions of wages withheld 
from labor. (2) Marx also held the view that the interests of 
capital and labor could never be reconciled. Hence he speaks 
of the " inevitable conflict " between these two factors in 
production. He believed, and his followers hold the same view, 
that it is only a question of time until the laborers of the world 
would be compelled to crush capitalism. Hence, they are 
inclined to oppose any schemes that have for their end the 
reconciliation of capital and labor. Here we have the reason 
for the inability of sociaUsm and organized labor to agree. 
Organized labor recognizes the mportance of the employer in 
industry. Moreover, its efforts are directed to the betterment 
of the working classes, and hence, a postponement of the 
" inevitable conflict." 

Socialism in operation. — The usual argument advanced 
against any proposal for the government regulation of industry 
is that it is socialistic. Every legislative act of Congress which 
has had for its end government interference in enterprise has 
been bitterly attacked on this ground. /Yet strange as it may 
appear, what is socialistic in one generation is likely to become 
a settled and widely accepted policy in the next. When the 
national government decided in 1887 to regulate interstate com- 
merce, many weU-meaning persons thought they saw the begin- 
ning of a socialistic state. Forty years of practice have pro- 
duced a change. No longer is there any opposition to the 
principle embodied in regulating railroads. This, however, 
is but a single illustration ; it might be duphcated almost 
indefinitely."/' From Congress, the state legislature, and city 



374 ELEMENTARY ECONOMICS 

councils there issues forth a constant stream of so-called 
socialistic legislation; that is, legislation which gives society 
more complete control over the factors of production. The 
longest step in this direction, taken to be sure as a war measure, 
occurred in December, 1917, when President Wilson, acting 
under authority conferred on him by Congress, took charge of 
the railroads of the country. Whatever our notions about 
socialism may be, whether we favor its doctrines or oppose them, 
we cannot shut our eyes to the fact that society is more and more 
intervening in the affairs of private industry. 

86. Criticisms of the Socialistic Program 

Character of human motives. — Criticism of the socialistic 
program may be made on several different grounds. Even those 
who are inclined to be friendly toward the views of socialism 
feel that socialistic leaders have minimized the importance of 
the motives which cause the normal individual to exert himself 
economically. Here no doubt is a source of weakness, for 
socialists seem to take too much for granted. They see modern 
industrial society as it is now constituted with its various groups 
of workers, its enterprisers, and its capitalists. They see 
large income streams flowing into the pockets of the last two 
groups. Perhaps they see also the skill of the enterprisers 
and the sacrifice of the savers of capital. Back of all of the 
labor, the skill, and the sacrifice is the desire to possess goods. 
If socialism meant nothing more than a socialization of pro- 
duction, little objection could be urged against it by those who 
sympathize with its aims. May it not mean more than merely 
a socialization? May it not also mean the destruction of the 
force that drives men to their best endeavors, not only enter- 
prisers but laborers? May it not ultimately undermine the 
very industrial structure which modern society has erected? 
These are pertinent questions which demand attention and 



SOCIALISM 



375 



even serious consideration ; for the first step in socialism, if it 
be decided to give it a trial, may be to reshape human nature — 
that is, to destroy individual selfishness. 

The institution of private property. — A second obstacle to 
the socialistic goal is the institution of private property. For 



SRAUoe 




Copyright Underwood & Underwood, New York 

Soldiers and Sailors Breaking up a Socialist Meeting 
(in Boston, Mass.). 

centuries individuals the world over have been accustomed to 
hold various forms of property to the exclusion of all the rest 
of mankind. Each one speaks of Ms land, Ms money, or Ms 



376 ELEMENTARY ECONOMICS 

goods. No other race of people has held so stubbornly to this 
principle as have the English, who insist that a man's house is 
his castle. For the individual to give up his property rights to 
society is beyond the conception of the ordinary man. It is 
doubtful if more than a scant few, all avowed socialists, would 
subscribe to such a principle. The assumption might be drawn 
from what has just been said that socialism is opposed on the 
ground that practically every one in this country owns property 
which a socialistic state would take over. Such, however, is 
not the case, for in so far as land is concerned more than one- 
half of the people of the United States are propertyless. Why, 
then, we may ask, do not those who would profit under socialism 
immediately vote to adopt the system? The answer is easily 
given when once we really understand human nature. First, 
the great bulk of men have never questioned, even in their own 
minds, the sanctity of private property rights. Second, the 
typical propertyless individual hopes some day to possess 
property of his own. Here, as in the case of economic motives, 
considerable education will be needed before any thorough- 
going socialistic program can be carried out. A broad education 
it must be, which will emphasize the superior needs of society, 
the subordination of individual rights to social rights, and the 
spiritual admonition that it is more blessed to give than to 
receive. 

Difficulties of administration. — - Assuming that a state has 
advanced to the point where its members are willing to exert 
themselves just as efficiently as they do now and to give up 
portions, at least, of their private property to the state, there 
would still remain serious administrative problems. Capital 
would be just as necessary under the new condition as under 
the old. Enterprising skill could not be dispensed with. 
Some one would have to make decisions as to amount and 
character of output, and to methods of distribution. What 



SOCIALISM 377 

particular goods shall be produced? in what quantity? how- 
much shall be paid to each workman ? how much shall the enter- 
priser get? The number of questions of this character which 
we might raise is limitless. The mere fact, however, that 
socialists cannot answer any one or all of such questions does 
not necessarily condemn the socialistic program. Every new 
program must face the same difficulty. It is doubtful, for 
example, if Jefferson, or Franklin, or any other one of the 
men who drew up the Constitution of the United States in 
1787, could have answered one-tenth of the questions which 
have since confronted the national government. Simply be- 
cause we cannot see how each detail is to be carried out in a 
socialistic state, is not sufficient ground on which to reject 
socialism. Our final judgment must be based on more evidence. 

87. Some Substitutions for Socialism 

Government regulation. — Earlier in the chapter mention 
was made of the fact that society in this country has under- 
taken a variety of industrial activities which show unmistakable 
tendencies toward the socialistic program. Socialists them- 
selves say that these undertakings are mere substitutes for 
socialism, if not indeed flimsy makeshifts. 

The most outstanding substitute of this nature is government 
regulation. We have already seen how Congress has provided, 
in the Interstate Commerce Act and its amendments, for regu- 
lating trade among the states. But the national government 
has gone much farther in this respect. We have anti-trust 
laws, child-labor laws, pure-food laws, drug laws, laws regulating 
the inspection of meat products, government manufactures of 
war materials, and public shipyards. Our participation in the 
Great War compelled unheard-of regulative measures in pro- 
duction. Raw materials were apportioned among manu- 
factures, the country experienced " coalless " days, while even 



378 ELEMENTARY ECONOMICS 

consumers were told what they might eat. Since government 
regulation seems to be the first step toward government 
ownership and government operation, all such regulative meas- 
ures are regarded by many with grave apprehension. 

Government cooperation. — The government has also co- 
operated in some industries. The most familiar example in this 
respect is the ship subsidy, whereby the government for a 
nominal economic service pays to shipowners stated sums of 
money in order to encourage shipbuilding and ship operations. 
Irrigation is another example. Here the government builds 
storage basins from which it supplies water to farmers in the 
near-by regions. In other words, the government cooperates 
in production. Obviously, grave dangers lurk in government 
cooperation, for to open the government purse to the hands of 
private individuals on the pretense of public welfare, is a 
temptation sometimes difficult to resist. I 

The problem of government operation. — Our government has 
had too little experience in the operation of industry, to permit 
of any judgment being formed as to the merits of government 
ownership. We have conducted the post office with a fair 
degree of efficiency, and, much to the surprise of many people, 
the national government dug the Panama Canal at an enormous 
cost free from suspicion of graft or political jobbery. Could we 
hope to carry on other industries with the same measure of suc- 
cess? Some say. Yes ; others. No. Neither side has much data 
on which to base conclusions. Those who answer yes, point 
to the success of the post office as an evidence of government 
efficiency. Those who answer no, lay stress on the temptation 
of public officials to be careless with public affairs. They direct 
attention to the " pork-barrel " practices of making appropria- 
tions for public improvements, and from this fact they conclude 
that industry in general would be in grave danger if directed by 
the government. Government operation is likely to become 



SOCIALISM 379 

increasingly important as a social problem, and for that reason 
it is our duty to give careful attention to its solution. 

EXERCISES AND PROBLEMS 



1. Why may socialism be considered a distributive problem? 

2. May it be also a productive problem ? Explain. 

3. Why should every one carefully examine the claims of socialism ? 

4. Account for the hazy notions many people have concerning 
socialism. 

5. Do socialists look forward to an equal distribution of wealth? of 
income ? 

6. What essential beliefs divide socialists into groups ? 

7. Just what did Marx mean by the expression, "surplus value"? 

8. Do socialists urge friendly relations between employer and 
employee? Why, or why not? 

9. What human motives hinder socialism ? 

10. What is meant by the expression, "the institution of private 
property"? 

11. What administrative problems would confront a socialistic 
state ? 

12. What important present-day questions of production would 
persist under socialism? 

13. Why, or why not, may we justly demand that the solution of 
every administrative problem be pointed out before we give a respectful 
hearing to the principles of socialism? 

14. What is a substitute for socialism? 

B 

1. Consult with some well-known socialist in your community. 
a. Ask him about the socialistic attitude toward present-day 

production, consumption. 
h. Get his opinion on the trend of public thought regarding 

socialism since 1910. 

c. Inquire concerning the administrative difficulties socialism is 

likely to meet. 

d. Get his views on the relation of socialism to organized labor. 



380 ELEMENTARY ECONOMICS 

e. Learn the general attitude which socialism takes toward 
religion, education, marriage, charity. 

2. Inquire at random among older acquaintances concerning their 
notions of socialism. 

a. How many of the whole number appear to have given socialism 

any serious thought? 

b. How many appear to have fixed convictions on the subject ? 

c. From your experience in this connection, what would you say 

regarding the general attitude of the American public 
toward socialism? 

3. Confer with the best-informed anti-socialist in the community 
and get his reaction on the claims made by your socialistic friends. 
Then you wiU be in a fairly good position to think for yourself. 

4. Analyze the answers of the business men to whom you put the 
following questions : 

a. What is the origin of private property? 

6. Why should an individual be permitted to own and control 
private property? 

c. Would you favor the socialization of all private property? . 

d. How would such a change affect society? industry? 

5. List any arguments you may think important in support of the 
government ownership of railroads. List also opposing arguments. 



1. How would you expect a change to socialism to affect the 
following : 

o. Farming? 
h. Plumbing? 

c. Retailing ? 

d. Manufacturing? 

e. Teaching? 
/. Preaching ? 

g. Professional begging? 

h,. Lending money? 

i. Renting residence houses? 

J. Coal-mining ? 

k. Professional singing? 

2. Imagine a system of socialism in operation in this country, 
o. What problems concerning production might arise? 



SOCIALISM 381 

b. How would society be able to secure the services of skilled 

enterprisers ? 

c. From what source would capital come? 

d. What would determine the wages of plumbers, carpenters, 

unskilled workers ? 

3. To what extent, if at all, are the following socialistic : 
a. Maintenance of free public schools? 

h. Regulation of street-car fares? 

c. City ownership of a gas plant? 

d. Fixing the price of wheat? 

4. Explain just why socialism should oppose labor strikes, coopera- 
tion, profit-sharing, social insurance. 

SUPPLEMENTARY READING 

Bullock, Introduction to the Study of Economics, 3d ed., pages 494-513o 

Ely, Outlines of Economics, 3d ed., pages 627-640. 

Fetter, Economics, Vol. II, pages 470-490. 

Fisher, Elementary Principles of Economics, pages 35, 36, 369-371. 

Seager, Principles of Economics, pages 613-627. 

Seligman, Principles of Economics, 5th ed., pages 64, 136, 655-658. 

Taussig, Principles of Economics, 2d ed., Vol. II, pages 443-478. 



CHAPTER XXVIII 
SOCIAL INSURANCE 

88. The Risks of Industry 

Nature of the risks. — ■ One of the most outstanding features 
of modern industry is the constant risk to which laborers are 
exposed. Equally important is the inability of the laborer 
either to avoid the risk or to bear the financial burden which it 
may incur. We usually associate risks of industry with acci- 
dents such as cuts, burns, bruises, or even death. But risk, 
every laborer knows, has a wider application. Sickness from 
natural causes, overwork, or exposure, stares him constantly in 
the face. His " job " is insecure at the best, while old age can 
be forestalled only by premature death itself. Any one of 
these calamities, if long continued, endangers the worker's 
independence and tends to demoralize him. What to the well- 
to-do and the rich may appear as trifles, loom large in the 
experiences of the mass of labor. An accident, a few weeks' 
illness, or a month's idleness means self-denial on the part of 
every member of the family. Many an industrious worker has 
struggled for years only to find from time to time his scant 
savings swept away in doctor bills. Even though he be for- 
tunate in these respects there still remains old age with its lower 
earning power, its dependence, its aches and pains. Few 
laborers above the age of sixty-five are independent, the great 
majority of them depending more or less on relatives, friends, 
or public charity. 

382 



SOCIAL INSURANCE 383 

Inability of individuals to carry risks. — Since it is a self- 
evident fact that workers are endangered on every hand, why 
do they themselves not adequately prepare for enforced idleness 
or old age ? A complete answer involves many considerations. 
First, a worker, like other people, gives little thought, as long 
as he is well and strong, to accident, sickness, or old age. He 
sees no need for taking measures against a calamity that may 
never come. His greatest concern is in his immediate task. 
Present wants obscure future demands. Suppose, however, 
that the typical American workman, realizing the risks to 
which he was exposed, should decide to save enough to tide him 
over periods of sickness or idleness, or even to maintain him in 
decency during his old age. Even then it is doubtful that he 
would succeed, for no system of budgets yet devised for the 
workers shows any surplus above present needs, large enough 
for such a purpose. The simplest calculation shows that family 
incomes of five or six hundred dollars a year are too slender 
to permit of savings of any consequence. For the same reason 
our worker carries little or no insurance against loss, even where 
insurance is possible. The two chief obstacles to individual 
protection, therefore, are lack of foresight and lack of funds. 
Either alone is of no avail. 

Arguments for social insurance. — If the individual will not 
or cannot protect himself against industrial mishaps, it is the 
duty of society to come to his aid. Society has a varied interest 
in the welfare of its workers. First, the workers are members of 
society. Second, society in the long run does provide for all. 
Third, society enjoys the product of labor. We have learned 
already that the interests of society are best promoted by giving 
attention to the interests of its individual members. Any 
large group of dependents, we may safely assume, is a menace to 
the social group of which they are a part. Furthermore, it is 
doubtful if society as a whole would be more greatly hindered 



384 ELEMENTARY ECONOMICS 

if some form of insurance were provided in place of the prev- 
alent haphazard methods now employed in our charity work. 
It is a fact generally overlooked that nowhere in this country 
do the authorities intentionally permit individuals to starve 
or to go unattended if aged or ill. In other words, our state- 
regulated charities guarantee a minimum of food, clothing, and 
shelter. Since this is true, the question may be raised : Why 
change the plan now in general use ? A change is desirable if 
for no other reason than to make the recipient feel that he is 
not an object of charity, but an unfortunate partner in a mutual 
protective concern controlled by the state. Finally, it is 
doubtful if a well-regulated insurance scheme that provides 
contentment as well as protection would in the long run cost 
society a dollar. Workers free from worry turn out more prod- 
uct than those who fear to take a day off with a day's loss of 
wages or those who return to work before they are physically 
fit. In any case society as such consumes the product of labor 
and ought out of sheer justice to be willing to protect laborers 
against risks for which they themselves are not responsible. 

Risk an element in costs of production. — Employers have 
generally protested against social insurance on the ground that 
the payments they are called on to make are an unbearable 
burden. Every one of these same employers provides for the 
wear and tear on buildings and machinery by setting aside what 
is known as the replacement fund. When a steam boiler, for 
example, is no longer fit for use, he buys a new one from this 
fund. We may properly inquire as to the source of this fund. 
Production, we have already learned, merely means creation of 
utilities. The obsolete steam boiler has been transformed, so 
to speak, into shoes, hats, cloth, or whatever else the finished 
product of that particular factory happens to be. Obviously, the 
price of the finished product must, under normal conditions 
and in the long run, be large enough to provide for deterioration 



SOCIAL INSURANCE 



385 




CopyriglU Underwood & Underwood, New York 

Building a Modern Skyscraper. 



386 ELEMENTARY ECONOMICS 

in instruments of production. Otherwise the world would soon 
be out of such instruments. Why should a distinction be made 
between a worn-out machine and a worn-out worker ? If society 
can afford to repair and replace steam boilers, why may it not 
afford to doctor its sick and injured, and to pay at the end of a 
worker's life a lump sum to his dependents? The world, as 
we shall see in the following paragraphs, is fast coming to 
believe that society cannot escape the responsibility ; that 
is, that prices must be high enough to care for a portion, at 
least, of the costs of labor upkeeps. 

89. Kinds of Social Insurance : Europe 

Accident insurance. — Of the various kinds of social in- 
surance the most important in many respects is accident in- 
surance. In 1884 Germany provided that employers must form 
mutual accident insurance associations, which should collect 
dues from employers and pay benefits to victims of accidents or, 
in case of death, to the family of the deceased. The employers 
themselves manage the affairs of their respective associations, 
though the German government through its Imperial Insurance 
Office exercises a certain amount of oversight and acts as a 
mediator in all cases where an injured employee is dissatisfied 
with the award made by one of the associations. Ten years 
later Norway instituted a government-controlled system of 
accident insurance. The employers of that country pay into a 
state insurance fund premiums which are based on the size of 
wages and the degree of risk to which each employee is exposed. 
The state itself administers the funds, paying the victims of 
accidents according to a carefully prepared scale. In 1897 an 
English law provided that employers should be liable for 
accidents to their employees, but it did not provide that em- 
ployers should organize for mutual protection ; that is, each 
employer could insure his men against accident in some insur- 



SOCIAL INSURANCE 387 

ance society, or, if he preferred, carry his own risk. One of 
these three methods has been adopted in practically every 
European country. 

The administration of accident insurance is fairly easy. In 
Germany, the benefits paid during the first thirteen weeks 
following an accident come from a sick fund, which the em- 
ployees themselves must largely provide. Obviously, the object 
of this scheme is to restrict the use of the funds of the employers' 
associations to those who suffer from serious accidents. Besides, 
since the first thirteen payments come largely out of the pockets 
of the employees, there will be less temptation for an employee 
to pretend to be injured in order to get a few weeks' rest. 

Insurance against illness and old age. — The German plan of 
insuring against illness was instituted in 1883. There the state 
requires each employer to purchase weekly from the post office, 
insurance stamps for each of his employees. At least one-third 
of the cost of the stamps must be contributed by the employer, 
who may, if he chooses, deduct the other two-thirds from his 
employees' wages. Should an employee become ill he has his 
stamps, which are fastened to insurance cards, as evidence that 
he is insured. The provisions of the German law cover many 
different aspects of illness. (1) Naturally the first provision 
is for free medical attention. In case of serious accidents, such 
as the loss of a leg or an arm, the state supplies artificial limbs. 
(2) Free hospital service is also furnished where necessary, and 
special attention is given to hospitals for young mothers and 
babies. (3) One-half of the wages of an ill workman are paid 
for a maximum period of six months. (4) Finally, small 
benefits are paid to the dependents of deceased employees. 
Germany provides also for compulsory insurance against the 
hazards of old age. As in the case of illness employers must 
affix stamps to insurance cards, being permitted to withhold 
at most one-half of the amount from employees' ^wages. The 



388 



ELEMENTARY ECONOMICS 



buying of stamps begins for each employee at the age of sixteen. 
Benefits are first paid at the age of seventy, or earher to those 
who are totally incapacitated for labor. Both the premiums on 
the insurance and the benefits paid to the insured are relatively 
small. The first average only a few cents each week (3^ to 9) 
while the latter average approximately one dollar a week. 




Copyright International Film Service, New York. 

Feeding the Unfortunate. 
Here we see homeless men being fed at public expense. 

Great Britain has also provided insurance against illness 
(1912) and old age (1908). In each case the British law is 
similar to that of Germany. British employers must purchase 
illness insurance stamps for their employees, the two groups 
sharing about half and half in their cost. The benefits resemble 
the benefits under the German system, the chief features being 



SOCIAL INSURANCE 389 

free medicine, free hospital service, and weekly sick benefits 
($2.50 for men and $1.75 for women). Under the British old- 
age pension law any wage-earner of that country, when he 
reaches the age of 70, is entitled to a small pension if he can 
prove that he has lived in Great Britain during the past twenty- 
six years and does not already have an annual income exceeding 
about $150. 

Insurance against unemployment. — The most difficult of all 
forms of social insurance to administer is unemployment insur- 
ance. Dishonest employees may pretend to be ill or injured 
only at the risk of having their dishonesty easily detected. In 
the matter of unemployment, however, the situation is different. 
No human agency yet devised could successfully distinguish 
between inability to find work and laziness. For that reason 
unemployment insurance has lagged behind. In the Belgian 
city of Ghent, however, the trade unions, assisted by donations 
from the city treasury, have undertaken to pay small benefits 
to the unemployed. Since the unions themselves are vitally 
interested in the money they pay out, abuse of the benefits on 
the part of the dishonest is reduced to a minimum. Great 
Britain has undertaken in a much more ambitious way to insure 
against unemployment. There employment bureaus supported 
by the state attempt to keep unemployed labor moving in the 
direction of jobs. Certain trades enjoy special protection 
against unemployment. In these trades employers must pro- 
vide each employee with stamped cards, which guarantees, in 
case of unemployment, a small benefit of $1.75 a week for a 
maximum of fifteen weeks. 

90. Progress and Outlook of Social Insurance 
IN THE United States 

Constructive legislation. — The only important step taken in 
this country toward state regulation of social insurance has 



390 ELEMENTARY ECONOMICS 

been in connection with industrial accidents. Until recently the 
old common law, which lays a great deal of responsibility for 
accidents on the employees themselves, was in full force. Under 
this law an injured workman had no legal redress against his 
employer if it could be proved that either he or any of his 
fellow employees had been the cause of the accident. Even 
when the employer was clearly to blame it was almost im- 
possible for an injured employee to secure damages, owing to the 
heavy costs of court htigation. Now and then an injured em- 
ployee was able to secure a large damage from his employer, 
but this was the exception rather than the rule. Usually also 
a large portion of such awards went to pay legal fees and court 
costs. It must not be thought, however, that the employer 
had no worries in this connection. He stood in constant dread 
of being sued for damages resulting from accidents ; and the fact 
that he usually won his cause in court carried little consolation, 
for legal successes are excessively costly. 

It is little wonder then that Congress as well as various state 
legislatures finally gave attention to providing compulsory 
accident insurance. In 1908 a federal law provided accident 
insurance for a majority of the industrial employees of the 
government. A little later many of the states took steps to 
protect privately employed workmen. The result has been that 
more than one-half of the states have workmen's compensation 
laws. Naturally these laws vary in detail, yet they possess in 
general three characteristics: (1) protection for workers in 
hazardous occupations, (2) little or no responsibility for acci- 
dents placed on employees, (3) costs of maintaining insurance 
imposed on employers. In some of the states, employers must 
provide accident insurance for their employees. In others it is 
a matter for employers and their employees to decide ; usually 
with the provision that the refusal of either party to enter 
into such voluntary arrangements as were provided by the 



SOCIAL INSURANCE 



391 




Copyright, Underwood & Underwood, New York. 

Dependent on Charity. 
Numerous private organizations assist in caring for dependent members. 



392 ELEMENTARY ECONOMICS 

state puts the party refusing at a disadvantage before the 
courts. 

A comprehensive program for social insurance. — Leaders of 
American thought have given careful attention to the question 
of social insurance in the hope of being able to formulate a set of 
general principles for the guidance of legislatures in enacting 
workmen's compensation laws. This they have done : the 
most active group, the American Association for Labor Legis- 
lation, has indorsed substantially the following standards : 

A. Compensation — 
Medical attendance. 
Two-thirds of regular wages. 
$20.00 weekly maximum. 
15.00 weekly minimum. 
Funeral expenses. 
One-third of wages to widow. 

B. Compensation to be the only remedy — 

Neither employer nor employee may bring suit under law of 
negligence. 

C. Exemptions from comi^ensation — 
Farm laborers. 

Domestic servants — • 

Hotels and restaurants excepted. 

D. Employers given option as to methods of insurance — 
Mutual associations. 

Stock companies. 
State insurance. 

E. Compensation laws administered by permanent accident board — 

F. Methods of settling claims — 
Arbitration. 

Accident board. 

Th. program is, to say the least, an ambitious one. It has 
for its end liberality as well as justice. It provides for the 
injured workman in a way so as not to offend his sense of self- 
respect ; gives employers an opportunity to choose their own 



SOCIAL INSURANCE 393 

insurance plan; and finally, it does away with undue risk, 
financial uncertainty, and costly litigation. 

The outlook. — The awakened consciousness of the people to 
the burdens which society for centuries has been laying on its 
weakest members is a sign of social health and social progress. 
It points to the day when the unfortunate industrial worker can 
demand as a right the financial protection of society ; a day when 
it is fully recognized that it is just as important to provide for 
wear and tear on men as for depreciation of inanimate machin- 
ery; a day when the strong will adequately recognize their 
responsibility to the weak. Social obligations, however, are 
two-sided. Workers as individuals. and as an industrial group 
cannot escape their responsibility to the larger social group. All 
have duties. No one can stand aloof from the crowd. A 
mutual understanding of the rights and duties of each is likely 
to be the longest step to be taken in reaching what some con- 
sider the industrial millennium. 

EXERCISES AND PROBLEMS 



1. Why are manual laborers, more than others, exposed to sickness, 
accidents, and death? 

2. Just how expensive, both from the individual and the social view- 
point, is each of these forms of disability? 

3. How does it happen that such a large proportion of old people 
are more or less dependent ? 

4. Why does not the normal individual guard himself more care- 
fully against accident and sickness? 

5. Can the typical American workman afford to carry any great 
amount of life or accident insurance ? Why, o^ why not ? 

6. Why should society undertake the protection of individuals? 

7. Why is charity inadequate? 

8. Just how does society guarantee a minimum to every individ- 
ual member ? 



394 ELEMENTARY ECONOMICS 

9. Why should society as a whole replace machines and not men ? 

10. What influence did the autocratic government of Germany 
have on the development of social insurance among the Germans ? 

11. In what particular respects does the English plan of social 
insurance differ from the German plan ? 

12. What are the outstanding features of accident insurance? 

13. Why has social insurance developed slowly in the United States? 

14. Just to what extent have we gone? 

B 

1. Call to mind any financial distress which you have observed 
caused by accident or illness. 

a. To what extent was the laborer responsible for his own accident 

or illness? 

b. Did he carry accident or sickness insurance? What kind? 

c. Was he a member of a fraternal order? Which? 

d. Did his employer aid him? How? 

e. Did his trade union assist him financially? 

/. How far, if at all, was he aided by organized charity ? 

2. Investigate any organized effort that is being made in your 
community to help the poor and unfortunate. 

a. What are the sources of financial support? 

i. To what extent, if at all, are these funds raised by taxation ? 

ii. Enumerate other methods of raising funds (tag days, etc.). 
h. What is the attitude of the people who are helped ? 
c. How is pauperization prevented? 

3. Name the various agencies in your community which extend 
financial assistance to the distressed. 

a. Which are religious in nature ? 

b. Which emphasize personal visitation? 

c. Which have membership dues? 

d. Which are purely philanthropic? 

4. Inquire as to the general attitude of your older acquaintances 
toward the county or other public almshouse. 

a. Does any stigma attach to its occupants ? Why, or why not ? 

b. Does any one take the view that it is merely a method of 

guaranteeing a minimum subsistence to each member of 
society? Who? 

c. What is the viewpoint of the occupants themselves? 



SOCIAL INSURANCE 395 

5. Look about for other means of extending financial assistance to 
the incapacitated : 

a. Public hospitals. 

h. Government pensions. 

c. State and federal houses for disabled soldiers and sailors. 

d. State institutions for the unfortunate. 

e. Old people's homes maintained by fraternal organizations. 
May we consider these as forms of social insurance ? Why, or why 

not? 

C 

L The assertion is often made that each individual usually has it in 
his own power to provide against the dependency of old age by saving 
systematically during his productive years. 

a. Might the typical American workman be more frugal ? How ? 
h. What other factor is necessary in saving ? 
c. Calculate the annual saving necessary for 40 years to insure 
an income of $300 a year at the age of 60 on a six per cent 
basis. 
, 2. One of the best-known American cartoonists showed recently 
the attitude taken by men engaged in hazardous occupations. A 
structural steel worker standing on a narrow beam twenty floors 
above the street and an aeroplane pilot in his machine a thousand feet 
above, each observing the other, remarked how foolish some men were 
in taking risks. Why did each minimize his own risk and magnify 
the risk of the other? 

3. Suppose that society should devise some plan whereby house 
painters would be insured by the public against accident, sickness, old- 
age dependence, and unemployment. 

a. Would the number of house painters tend to increase or 

decrease ? Why ? 
h. How would the wages of house painters be affected ? 

c. What would be the probable effect on the cost of painting a 

house ? 

d. In what way, if at all, would taxes be affected? 

e. Would a plumber's income be changed as a result? How? 

4. Would you class the following as forms of social insurance : 
a. Government pensions? 

h. Free treatment in railroad hospitals ? 
c. State aid for the blind ? 



396 ELEMENTARY ECONOMICS 

d'. Insane hospitals? 

e. Retiring allowances to aged preachers? 

/. Teachers' pensions? 

g. Payments from a fii-emen's pension fund? 

SUPPLEMENTARY READING 

Ely, Outlines of Economics, 3d ed., pages 57, 587-595. 

Fetter, Eco7iomics, Vol. II, pages 349-365. 

Seager, Principles of Economics, pages 598-612. 

Taussig, Principles of Economics, 2d ed.. Vol. II, pages 323-345. 



CHAPTER XXIX 

THE SHARE OF THE GOVERNMENT IN DISTRIBUTION 

(TAXATION) 

91. Government Revenues and Government Expendi- 
tures 

Revenues of various taxing bodies. — The number of taxing 
bodies to which any particular individual may be subject varies 
from a few to twenty-five or thirty. Farmers as a rule are sub- 
ject to only four or five such bodies, while a dweller in a large 
city, with its parks, hospitals, sewerage system, high schools, 
city colleges, or technical schools, and with numerous other 
agencies for the betterment of social conditions, finds a much 
greater number of official boards which have authority to tax 
his property. Our problem will be much simplified, however, if 
we confine our attention to (1) national taxes, (2) state taxes, 
and (3) local taxes. The national government possesses 
practically unlimited power in the matter of taxation, and, 
strange as it may appear, needs, under normal conditions, the 
least revenue. The states have much less power to lay taxes, 
though their needs in times of peace are greater than those of 
the national government. Finally, local needs — city, school, 
county, township — are the greatest of all ; yet they must be sup- 
plied by taxing bodies hedged about with constitutional or statute 
restrictions. In most states, for example, the taxing power 
of each school board is limited to a small per cent of the total 
wealth in the school district. This limitation may be imposed 
by constitutional provision or by legislative enactment. Similar 

397 



398 ELEMENTARY ECONOMICS 

limitations are very generally placed on city, county, township, 
road, bridge, park, and other taxes. We should be warned at 
this point that the emphasis we may lay on the restrictions on 
local taxing boards is in no way indicative that they are un- 
desirable, or even detrimental to the best interests of society. 

Receipts and expenditures of the national government. — 
Since the second year of the Civil War the receipts of the 
national government, aside from loans, have been largely derived 
from import (tariff) and excise (internal tax) duties. From 
approximately sixty million dollars in 1860 the annual ordinary 
receipts of the national government rose to three quarters of a 
billion dollars in 1914, and, under the stress of the Great War, to 
something like eight billion in 1919. The expenditure of these 
vast sums has taken a multitude of forms. During the last 
year prior to the outbreak of the War in Europe in 1914 the 
ordinary expenditures were as follows : 

Civil and miscellaneous $170,530,235.45 

War Department 173,522,804.20 

Navy Department 139,682,186.28 

Indians 20,215,075.96 

Pensions 173,440,231.12 

Interest on the PubUc Debt .... 22,863,956.70 

Total $700,254,489.71 

It is to be noticed that federal expenditures are undertaken 
primarily for national defense ; that is, the federal government 
assumes the duty of protecting state and local governmental 
units from foreign interference, leaving them free to manage 
their own affairs : about 70 per cent of the entire expenditures 
go directly or indirectly to war purposes. 

State and local expenditures. — State expenditures go largely 
to the militia, to schools, to charitable institutions, and to the 
maintenance of the courts. Their chief sources of revenue 
are real estate taxes, and license fees of various sorts. The 



SHARE OF GOVERNMENT IN DISTRIBUTION 399 



last few years have seen the activities of the states in these 
respects grow rapidly. The causes are obvious. People are 
more and more coming to the conclusion that the state govern- 
ment is in a position to take over many so-called private func- 
tions at a material saving in money cost. Nowhere else, 

Expenses of the Cities of the United States for Various 
Purposes: 1902-1912. 

PER CENT 
20 40 60 80 100 

1912 

191 I 
1910 
1909 



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EDUCATION 
mum POLICE DEPARTMENT 

GENERAL GOVERNMENT 

HIGHWAYS 

conservation of HEALTH 

FIRE DEPARTMENT 
^^^1 CHARITIES, HOSPITALS, AND CORRECTIONS 
I I ALL OTHER 

however, have receipts and expenditures grown as in the local 
units. The incorporated cities of this coiintry spend practically 
as much money each year as the national government and the 
forty-eight state governments combined. In 1914 the budget 
of the city of New York equaled approximately the total of all 
the state budgets west of the Mississippi River. In 1913 



400 ELEMENTARY ECONOMICS 

the per capita expenditures of cities was almost thirty dollars, 
while the same item for state expenditures was four dollars, 
and for the national government ten dollars. Heavy city 
expenditures have been accompanied in too many cases by 
extravagances and mismanagement. The influence that goes 
with the expenditure of municipal funds is an attraction which 
few local politicians can resist. It means patronage and hence, 
power. Here, then, is a problem which must be confronted, and 
unless the next generation aids in solving it, young people now 
being educated by the state shall not have returned to society the 
full measure which it has a right to expect from its heavy invest- 
ments in free schools. 

Definition of a tax. — It will add to clearness of the subject, 
if, at the outset, we distl^nguish between a tax and two other 
revenues that resemble taxes. " A tax is a payment, usually in 
money, exacted hy the government for the purpose of carrying on 
public enterprises for the common good." It will be noticed that 
payment is compulsory, and that expenditures are made for 
the benefit of society as a whole. Examples are the general 
property tax, income and inheritances taxes, and excises. 
Resembling a tax somewhat are the special assessment and the 
fee. As its name suggests, the special assessment is levied for 
the purpose of defraying a special public charge. Professor 
Seligman defines it as "a payment made once for all to defray 
the cost of a specific improvement to property undertaken in the 
public interest, and levied by the government in proportion to 
the particular benefit accruing to the property owner." Of 
the several kinds of special-assessment enterprises the best- 
known is the construction of city pavements. The same 
authority defines a fee as "a payment to defray the cost of 
each recurring service undertaken by the government primarily 
in the public interest, but conferring a measurable special 
advantage on the fee payer." The principle underlying the 



SHARE OF GOVERNMENT IN DISTRIBUTION 401 

fee is public regulation, though individuals that pay it are 
usually benefited. Fees are charged for marriage licenses, 
for recording of deeds, and for numerous other public services of 
like nature. 

92. Bases of Taxation , 

The benefit principle of taxation. — One of the very generally 
accepted principles of taxation is that taxes may be levied 
according to the benefits derived ; that is, the amount of each 
person's tax should correspond to the services which society 
renders him. Obviously, however, such a principle has, in 
practice, serious limitations. Sometimes those who are least 
able to pay taxes, need most the state's aid. The lower income 
groups, which pay a relatively small share of the school taxes, 
are the most highly favored by public education, for it would 
be cheaper for the well-to-do, in lieu of paying school taxes, to 
educate their own children in private schools. The truth of 
this statement becomes more striking when we consider that 
the property of unmarried persons and childless married 
couples is taxed for school purposes regardless of the fact 
that they receive no direct benefit in return. It has only 
been by short and somewhat halting steps that American 
society has arrived at the point where it is willing to abandon 
the benefit theory in levying school taxes. Not many 
years ago our state courts were " swamped " with suits in- 
stituted by property-owners in an effort to be relieved from 
being taxed to educate other people's children. In fact, in 
one populous Middle Western state the high school system owes 
its existence to the legal fiction that high school education is 
authorized by the statute which authorizes " common school " 
education. Numerous other exceptions may be found to the 
benefit theory of taxation. We do not inquire how much taxes 
an individual has paid when we admit him to a public hospital, 



402 ELEMENTARY ECONOMICS 

a public library, or to a public park. It is indeed fortunate for 
society that the benefit theory has been partially abandoned, for 
it fails in general to make the strong bear some of the burdens 
of the weak. Even the well-to-do who receive no direct benefits 
from school taxes profit indirectly and in the long run ; for 
public education, if it means anything at all, ought to stand for 
a more enlightened citizenship, for higher industrial efficiency, 
and for greater security for persons and property. 

The ability principle of taxat on. — It accords more with our 
sense of justice to levy taxes according to ability to pay. This 
policy we follow in asking for Y. M. C. A. and Red Cross sub- 
scriptions, and even in urging the people to purchase government 
bonds. But there is also an economic justification for com- 
pelling the well-to-do to pay taxes out of proportion to what may 
appear to be the benefits derived. Clearly, the millionaire 
ought to contribute more than a aboring man to protect the 
country against foreign invasion. Both have, or ought to 
have, equal personal interests in preserving the sovereignty of 
the nation. In addition, the former has extensive property 
rights which he expects the government to protect. Enforced 
contribution according to ability, if carried into the realm of 
prices, would, however, lead to ridiculous results. To employ 
an economic term, it would destroy what we called in an earlier 
chapter the consumers' surplus. 

Acceptance of the ability principle paves the way for two 
other considerations. Shall a tax be proportionate or progressive ; 
that is, shall persons pay in exact proportion to their means, or 
shall the rate of pay increase with an increase in wealth? To 
make our problem concrete let us suppose that we have under 
consideration the assessment of taxes against three individuals 
having property valued respectively at $1,000,000, $2000, and 
$500. A one per cent proportionate rate would produce 
$10,000, $20 and $5 in taxation, thus diminishing the wealth of 



SHARE OF GOVERNMENT IN DISTRIBUTION 403 

these three to $990,000, $1980, and $495. The question is: 
Has each individual paid according to his abihty? Is the 
sacrifice the same in the three cases ? One may mean merely the 
foregoing of a costly banquet ; another, the loss of a comfort ; 
while the third may mean sacrifice. To place the three on a 
more nearly equal basis progressive taxation is employed. Here, 
we may suppose, the individual with the lowest income pays 
one per cent, the next, two per cent, while the wealthiest of 
the three pays ten per cent. Then the amounts raised from the 
three would be $5, $40, and $100,000. The use of the pro- 
gressive system has been confined very generally in this country 
to income and inheritance taxes, largely because it is there, 
according to an old saying, that " the goose can be plucked 
with the least squawk." 

Justice and expedience in taxation. — Every one that has had 
experience in levying taxes lays emphasis in discussing them on 
the justice of taxation. It would be nearer the truth, however, 
to say that expediency is more often the basis on which taxing 
laws rest. Lawmakers know full well that no tax, whatever 
its size or character, is popular. For that reason they are in- 
fluenced in their legislation by the desire to create as little 
opposition as possible. Hence they cling to old taxes, to in- 
direct taxes, and to taxes on the rich. Paying an old tax, 
however burdensome and unjust it may be, in time becomes a 
habit much like paying the monthly grocery bill or the house 
rent. In other words, people become reconciled to its harshness. 
Indirect taxes are hidden in prices of goods, and hence are 
usually paid unconsciously by consumers. Few of us ever 
bother about the tax on tobacco, chewing gum, perfume, or 
playing cards. In making our purchases we compare only 
the value of the article to us with its price. Finally, taxes 
imposed on the rich are not likely to prove unpopular. The 
rich themselves may protest, but without support or sympathy. 



404 ELEMENTARY ECONOMICS 



93. Kinds of Taxes 



Shifting and incidence of taxation. — ■ An important phase of 
taxation relates to shifting and incidence. We have just 
noticed that the purchaser of a cigar gives httle or no attention, 
if indeed he be aware of it, to the fact that a portion of the pur- 
chase price is a tax which the manufacturer has paid to the 
national government and then shifted to the retailer, who in 
turn shifts it to the purchaser. The shifting of the tax on 
tobacco is not unique. Practically every tax can be passed on 
from one buyer to the next until eventually it is paid by the 
consumer. Duties on imports (tariff duties) are often shifted 
a great many times, the number depending on the number of 
transfers of ownership. The importer of English broadcloth 
pays a certain tax to the government, which he merely adds to 
the price of his goods. This same tax comprises a portion of 
the price which the garments made from it bear, and it is 
finally paid, not by the retail clothier, but by his customers. 
House taxes too emerge in the form of higher rents, while taxes 
on business of all sorts are largely absorbed in higher prices. 
It is generally held, however, that land taxes cannot he shifted; 
that is, the owner of a piece of land must bear the tax assessed 
against it. Most people doubt the accuracy of this statement. 
Yet it becomes obvious when we remember that the return from 
land is economic rent, which depends entirely on its relative 
superiority in the matters of production and location ; and 
that, if the tenant is paying full economic rent, he cannot afford 
to pay more ; also that the tenant cannot shift the tax by 
advancing the price of his products, for this price is fixed by 
the marginal producer. 

The general property tax. — The best-known tax of all is 
the general property tax. As the term suggests, this is a tax 
on wealth irrespective of its nature — that is, a tax on real 



SHARE OF GOVERNMENT IN DISTRIBUTION 405 

estate and personal property. This tax is assessed by one town- 
ship or county official and collected by another. It provides 
the bulk of local and state revenues ; and for that reason, if for 
no other, it ought to be sound in principle. But usually it is 
not. First of all, the typical general property tax law provides 
for the same rate of taxation on personal property as on real 
estate ; and as a result it defeats its own purpose, for only the 
most scrupulous — so few as to form a relatively small class — 
will disclose their entire personal wealth to a tax assessor. This 
does not imply that the American people are liars or even tax- 
dodgers. It does mean, however, that the average taxpayer, 
knowing that his neighbors do not disclose their personal prop- 
erty, feels justified in self-defense to refrain from disclosing his 
own. The general property tax glares with inequalities even if 
nothing except real estate were taxed. Usually a state imposes, 
for state purposes, one fiat rate over all its counties. Each 
county has its own body of assessors. As a result, widely differ- 
ent valuations are often placed on pieces of property having 
about the same value. If, to take an extreme example, the 
state tax rate is 50 cents on each hundred dollars' valuation, 
and one assessor estimates the average value of farm horses at 
$30 and another assessor at $50, one group of horse owners is 
overtaxed or the other group is undertaxed. Similar inequalities 
may easily occur in counties having township organizations. 
Some attempts are made, however, to equalize taxes both 
within states and within counties. To that end boards of 
equalization and boards of review have been established. If 
the general property tax is so unsatisfactory, why do not the 
voters abolish it and substitute a better kind of taxation? 
The answer seems to be that an old tax whose exactions are 
known is better than a new tax which may carry unknown 
burdens. In other words, the typical taxpayer prefers to let 
well enough alone. 



406 ELEMENTARY ECONOMICS 

The income tax. — The practice of imposing taxes on incomes 
has been general in Europe for years, and even in this country 
several of the states have had income-tax laws. During the 
Civil War the national government collected a tax on incomes. 
Later, in 1894, Congress again provided for a federal income 
tax. A few years later the United States Supreme Court 
declared this law unconstitutional on the ground that it was a 
direct tax not apportioned, as the Constitution required, among 
the states according to population. The people then took 
matters in their own hands. The result was the Sixteenth 
Amendment, which gives the federal lawmakers authority to 
tax incomes. The first income-tax law under the new amend- 
ment exempted all incomes below S3000 ($4000 for man and 
wife), and provided a progressive tax on all incomes above that 
point. The total amount raised the first year (1915) was 
approximately one hundred million dollars. Our entry into the 
Great War (1917) caused Congress to lower the exemption to 
$1000 and $2000 and to increase rates above that point. 

Until recently it was the general opinion that an income tax 
would prove to be unsatisfactory in this country. Our few 
years' experience, however, now leads us to the contrary view. 
This tax falls only on the well-to-do and the rich and it is diffi- 
cult to shift. It comes out of incomes, is easily collected, and 
has not proved excessively unpopular even among those who 
feel its exactions. It seems safe to predict, therefore, that the 
income tax will become increasingly important, both as a 
source of revenue and as a means for lessening the inequalities 
in distribution. 

Inheritance taxes. — An inheritance tax is collected on 
estates as they pass into the possession of heirs. Practically 
all states have such a tax, though less than a generation ago 
the right of the state to share in the estates of its citizens was 
very generally regarded with disfavor. Like the income tax. 



SHARE OF GOVERNMENT IN DISTRIBUTION 407 

the inheritance tax is usually confined to the estates of the well- 
to-do and the rich, and almost always bears a progressive rate. 
Unlike an income tax, however, an inheritance tax is paid from 
capital and not from income. The principle involved in taxing 
estates is of great social importance. Often a deceased has no 
near heirs, none, let us say, nearer than a second or third cousin. 
AVhy, in the absence of a will, should these distant relatives 
have a greater interest in the estate than the neighborhood 
where the deceased had spent his whole life, or the business 
men with whom he had been associated for years? On what 
common-sense ground can a distantly related person, one 
perhaps whom the deceased had never known, claim to inherit 
property? Both questions were revolutionary a generation 
ago. They are less so now. Another generation may see them 
answered in the interest of the state. 

Other kinds of taxes. — -The forms of taxation just noticed 
do not by any means exhaust the list, though in many respects 
they are the most important. Others that might have been 
discussed are tariff duties, excise taxes, taxes on transactions, 
corporation taxes, business taxes, license taxes, and poll taxes. 
Each has its own problems of administration ; each serves a 
particular purpose ; but all at bottom involve the same general 
principles which we have already noted. 

EXERCISES AND PROBLEMS 
A 

1. Why are there often so many taxing bodies in a community? 

2. What only restricts the power of Congress to lay taxes? 

3. Is this restriction important? Why, or why not? 

4. In what ways are taxing powers of local units limited? 

5. Why should the right of a school district to tax itself be regulated 
by state law ? 

6. Are these regulations desirable ? Explain. 



408 ELEMENTARY ECONOMICS 

7. Account for the increase in the revenues of the national govern- 
ment during the past half century. 

8. What is the chief money-spending function of the national 
government ? 

9. What are the principal revenue sources of the school district? 
the county? the city? 

10. What is the justification for government expenditures where 
private funds would otherwise be used? 

11. What risks are involved in government expenditures? 

12. Why, or why not, should taxes be levied according to benefit? 

13. What is the relation between the need of public assistance and 
the ability to pay taxes? 

14. Why should a school tax levied according to the benefit principle 
be impracticable? 

15. How does the ability principle of taxation tend to equalize 
incomes ? 

16. What is the essential difference between a proportionate tax 
and a progressive tax ? 

17. What are the merits of each ? 

18. Just what is meant by "expediency" in taxation? 

19. Why is an old tax usually preferred to a new tax ? 

20. When is a tax said to be "shifted"? 

21. Why are taxes usually easy to shift ? Explain. 

22. Which taxes are the easiest to shift? Why? 

23. What is a "general property tax"? 

24. What are its chief defects? 

25. Why do many people, otherwise honest, falsify their personal 
property tax-schedules ? 

26. Why should income taxes and inheritance taxes be confined to 
the well-to-do classes? 

27. What is the essential difference between an income tax and an 
inheritance tax? 

. 28. Just why was a constitutional amendment necessary to legalize 
a federal income tax? 

B 

1. Get from the local tax-collector or from the proper county official, 
information concerning rates of taxation, purposes for which various 
taxes are imposed, the cost of collection, and the attitude which 
people take toward each kind of tax. 



SHARE OF GOVERNMENT IN DISTRIBUTION 409 

2. Interview some friendly taxpayer. 

a. How does he regard the school tax? 

6. Has he suggestions to offer concerning changes in taxation? 

c. Does he consider the valuation placed on his own property 

for taxing purposes equitable compared to the valuation 
placed on his neighbors' properties ? 

d. Get his opinion on the weakness and strength of the general 

property tax. 

3. Make a list of enterprises supported out of public funds, which 
enterprises provide services free to all, regardless of their tax-paying 
abilities. 

4. Secure, if possible, published lists of personal property assessments. 
a. Do there appear to be any discrepancies between the valuation 

placed on the personal property of any individual and the 

amount of personal property he is reputed to possess? 
h. How does the total valuation of personal property compare 

with the total valuation of real estate for the same area ? 
c. Is there in your community a limit below which personal 

property is not assessed? If so, why? 

5. Inquire of some tax-assessing official about the difficulties of 
determining property values, the inclination of people to undervalue 
their own property, the general dissatisfaction with valuations, and the 
criticism made of them. 

6. Suppose you were a member of a lawmaking body which had 
before it a bill for taxing boarding-house keepers ten dollars a year 
each, on the ground that the money thus raised in each city would pay 
the salary of a boarding-house inspector for that city. 

a. What is your first reaction on the question? 

h. Do boarding-houses need to be inspected? Why? 

c. If so, who should pay the expense of inspection? Why? 

d. How would the fact that you represented a college town or a 

mining district affect your vote? 

e. How would you expect members from rural districts to vote? 



1. The property of the residents of a certain section of one of the 
largest cities in the United States is taxed by twenty-seven taxing 
boards. 

a. Why have so many taxing boards been developed ? 



410 ELEMENTARY ECONOMICS 

h. Is it probable that one taxing body could accomplish the same 

purpose ? Explain, 
c. Would you expect the aggregate rate to be higher in one case 

than in the other? Why, or why not? 

2. In the matter of official patronage, measured either in numbers 
or in salaries, the Mayor of New York City ranks alongside the Presi- 
dent of the United States. 

a. Account for this fact. 

b. Compare the receipts and expenditures of the two organi- 

zations. 

c. Contrast the governmental functions of the two organizations, 

3. The argument is often advanced that each should be taxed 
according to the benefit he gets from the expenditure of public money. 

a. What effect do good schools have on the number and character 

of the people in the community? 

b. How does an increase in population together with a rise in its 

standards affect property values? legitimate business? 

c. What return, then, does a childless property-owner or a child- 

less business man get from his school taxes ? 

4. The administration of a tax levied according to the benefit prin- 
ciple would be extremely difficult. 

a. When should each property holder pay his taxes for the support 

of a city fire department ? 

b. What should each pay toward maintaining a public park? a 

health bureau? 

c. Why should not nonresident owners of vacant lots be entirely 

exempt from such taxes ? 

5. The statement that a land tax cannot be shifted needs to be 
examined with care. Would the shifting be possible if the tax collected 
were spent on building improved wagon roads? Can you think of 
other expenditures that might add to the productiveness of the land 
taxed, and hence increase its economic rent? 

SUPPLEMENTARY READING 

Bullock, Introduction to the Study of Economics, 3d ed., pages 529-587. 

Ely, Outlines of Economics, 3d ed., pages 643-739. 

Seager, Principles of Economics, pages 472-535. 

Seligman, Principles of Economics, 5th ed., pages 267-270, 303. 

Taussig, Principles of Economics, 3d ed., Vol. II, pages 483-560. 



CLASSIFIED COURSE OF READING 

In the brief lists that follow, the standard college texts referred to at 
the close of each chapter are Usted as a matter of convenience, together 
with additional titles, under General Economics. In choosing the 
rest of the titles, the author has attempted to confine himself to what 
are coming to be known as " economic problems." Those best adapted 
to beginners are marked with an asterisk [*]. The rest may profitably 
be studied by teachers and business men ; also by advanced pupils. 

I. General Economics 
*Bullock, C. J. : An Introduction to the Study of Economics. 
*Carver, T. N. : Principles of Political Economy. 

Clark, J. B. : The Distribution of Wealth. 

Commons, J. R. : The Distribution of Wealth. 
*Ely, R. T. : Outlines of Economics. 
*Fetter, F. A : Economics. 
*Fisher, Irving : Elementary Principles of Economics. 

Gide, Charles : Principles of Political Economy. 

Gide, Charles : Political Economy. 
*Johnson, A. S. : Introduction to Economics. 

Marshall, Alfred : Principles of Economics. 

Mill, J. S. : The Principles of Political Economy. 

Patten, S. N. : The Premises of Political Economy. 
*Seager, H. R. : Principles of Economics. 
*Seligman, E. R. A. : Principles of Economics. 

Smith, Adam': Wealth of Nations. 
♦Taussig, F. W. : Principles of Economics. 
*Walker, F. A. : Elementary Course in Political Economy. 

Walker, F. A. : Political Economy. 

II. Money, Banking, and Public Finance 
Bullock, C. J. : The Monetary History of the United States. 
Cannon, J. G. : Clearing Houses. 

411 



412 CLASSIFIED COURSE OF READING 

*Clare, George : The A B C of the Foreign Exchanges. 

Conant, C. A. : The Principles of Money and Banking. 

Conant, C. A. : History of Modern Banks of Issue. 

Dewey, D. R. : Financial History of the United States. 

Fisher, Irving : The Purchasing Power of Money. 

Fisher, Irving : Why the Dollar Is Shrinking. 

Fiske, A. K. : The Modern Bank. 

Hepburn, A. B. : Contest for Sound Money. 
*Hold5Worth, J. T. : Money and Banking. 
*Johnson, J. F. : Money and Currency. 

Jones, E. D. : Economic Crises. 

Kemmerer, E. W. : Postal Savings. 

Kemmerer, E. W. : The A B C of the Federal Reserve System. 

Kinley, David : Money — A Study of the Theory of the Medium of 
Exchange. 

Laughlin, J. L. : History of Bimetallism in the United States. 

MacGregor, T. D. : The Book of Thrift. 

Noyes, A. D. : Financial Chapters of the War. 
*Scott, W. A. : Money and Banking. 
*White, Horace : Money and Banking. 
*Willis, H. P. : The Federal Reserve. 

Willis, H. P. : History of the Latin Monetary Union. 

III. Labor 

*Abbott, Edith : Women in Industry. 

*Adams, T. S., and Sumner, Helen: Labor Problems. 

Butler, E. B. : Women and the Trades. 
*Carlton, F. T. : The History and Problems of Organized Labor. 

Commons, J. R. : Labor and Administration. 

Ely, R. T. : The Labor Movement in America. 

Gilbert, Eleanor: The Ambitious Woman in Business. 

Gilman, C. P. : Women and Economics. 

Goldroark, Josephine : Fatigue and Efficiency. 

Groat, G. G. : An Introduction to the Study of Organized Labor in 
America. 

Hollander, J. H., and Barnett, G. E. : Studies in American Trade 
Unionism. 

Laidler, H. W. : Boycotts and the Labor Struggle. 

Mangold, G. B. : Problems of Child Welfare. 



CLASSIFIED COURSE OF READING 413 

*McLean, Anna M. : Wage-Earning Women. 
*MitcheU, John : Organized Labor. 
*Shadwell, Arthur : Industrial Efficiency. 

Spargo, John : The Bitter Cry of the Children. 

Webb, Sidney and Beatrice : Industrial Democracy. 

IV. Immigration 

Commons, J. R. : Races and Immigrants in America. 
*Fairehild, H. P. : Immigration. 

Hall, P. F. : Immigration and its Effects on the United States. 
*Hourwich, I. A. : Immigration and Labor. 

Jenks, J. W., and Lauck, W. J. : The Immigration Problem. 

Roberts, Peter : The New Immigration. 
*Warne, Frank : The Immigrant Invasion. 

V. Socialism and Social Insurance 

Angell, Norman : The British Revolution and the American Democracy. 

Brooks, J. G. : The Social Unrest. 

Brooks, J. G. : American Syndicalism. 

Cross, I. B. : The Essentials of Socialism. 
*Ely, R. T. : Socialism and Social Reform. 

Engels, Frederick : Socialism, Utopian and Scientific. 

Ghent, W. J. : Mass and Class. 
*Henderson, C. R. : Industrial Insurance in the United States. 

Hillquit, Morris : Socialism in Theory and Practice. 
*Hillquit, Morris : History of Socialism in the United States. 

HiUquit, Morris, and Ryan, J. A. : Socialism, Promise or Menace ? 

Hughan, J. W. : American Socialism of the Present Day. 

Hunter, Robert : Socialists at Work. 

Hunter, Robert : Violence and the Labor Movement. 

Kautsky, Karl : The Social Revolution. 

Macdonald, J. R. : The Socialistic Movement. 

Mallock, W. H. : A Critical Examination of Socialism. 

Marx, Karl : Capital. 

Myers, W. S. : Socialism and American Ideals. 

Nearing, Scott : Income. 

O'Neal, James : Militant Socialism. 

Ryan, J. A. : A Living Wage. 



414 



CLASSIFIED COURSE OF READING 



Sellars, R. W. : The Next Step in Democracy. 

Skelton, O. D. : Socialism, a Critical Analysis. 
*Spargo, John : Socialism. 

Spargo, John : Capitalist and Labor. 

Spargo, John : The Substance of Socialism. 

Spargo, John : Syndicalism, Industrial Unionism and Socialism. 

Spargo, John : The Socialists, Who They Are and What They Stand For. 
*Vaughan, (Father) Bernard : Socialism from the Christian Stand- 
point. 

Veblen, Thorstein : The Theory of the Leisure Class. , 

Walling, W. E. : Socialism as It Is. 
*Wells, H. G. : New Worlds for Old. 



VI. Tariff 

Modern Tariff History. 
The Tariff Problem. 
Free Trade and Protection. 

Selected Articles on Free Trade and Protection. 
The Economic Basis of Protection. 
Pierce, Franklin : The Tariff and the Trusts. 

*Stanwood, Edward: American Tariff Controversies in the Nineteenth 
Century. 

Protectionism. 
; The Tariff in Our Times. 
Tariff History of the United States. 
State Papers and Speeches on the Tariff. 
Some Aspects of the Tariff Question. 



Ashley, Percy ; 
Ashley, W. J. : 
Eaton, A. M. : 
Morgan, J. E. 

Patten, S. N. : 



Sumner, W. G. : 

*Tarbell, Ida M. 

♦Taussig, F. W. : 

Taussig, F. W. : 

Taussig, F. W. : 



VII. Trusts 

*Jenks, J. W. : The Trust Problem. 

Lloyd, H. D. : Wealth against Commonwealth. 

Montague, G. H. : The Rise and Progress of the Standard Oil Company. 
*Moody, John : The Truth about the Trusts. 
*Tarbell, Ida, M. : The History of the Standard Oil Company. 



INDEX 



Advertising, influence of, 40, 41. 

Agricultural rent, discussion of, 330- 
334. 

Agriculture, developments in, 87, 88 ; 
tendencies in, 109 ; varying costs 
in, 116; extent of, 118; application 
of the law of diminishing returns to, 
122-126. 

American Federation of Labor, in- 
fluence of, 312, 313. 

American industrial revolution, na- 
ture, of, 86. 

Arbitration, labor disputes settled by, 
319-321. 

Balance of trade, nature of, 247, 248. 

Baltimore and Ohio Railroad, opening 
of, 156. 

Bank check, form of, 228. 

Bank note, nature of, 228. 

Bank statement, explanation of, 231- 
233. 

Banking, history of, 227-237. 

Barter, disadvantages of, 22. 

Bill of exchange, nature of, 245-249. 

Bimetallism, description of, 213, 214, 
217, 218. 

Bland-Allison Act, provisions of, 220. 

Bonds, nature of, 93. 

Borrower, viewpoint of, 346, 347. 

Building and loan association, im- 
portance of, 74; statement of, 
76-78. 

Business man, characteristics of, 357, 
358. 

Buyers' schedule, nature of, 59. 

Buyers' surplus, nature of, 57. 

By-products, utilization of, 110. 

California, production of gold in, 120, 

218. 
Canals, construction of, 156. 



Capital, growth of, 85; definitipn and 
origin of, 99; discussion of, 130- 
139. 
Capital (Das Kapital), socialistic doc- 
trines in, 371, 372. 
Capitalistic production, nature of, 

132-134. 
Chain stores, business of, 178, 179. 
Checks (bank), use of, 244. 
Child labor, opposition to, 322. 
Child labor laws, enactment of, 377. 
Christian socialists, leaders of, 371. 
Circulating capital, definition of, 134, 

135. 
City sites. See Urban land. 
Class antagonism, causes of, 287, 289. 
Clayton Anti-Trust Act, provisions of, 

190. See Trusts. 
Closed shop, definition of, 315. 
Closed union, definition of, 315. 
Coinage, operation of, 213, 214, 217, 

218. 
Comforts, definition of, 30. 
Commerce, discussion of, 241-252. 
Commercial bank, functions of, 229. 
Commercial education, scope of, 9. 
Communist Manifesto, extract from, 

372. 
Competition, nature of, 141-145; in- 
fluence on monopoly price of, 147, 

148; among railroads, 158-161; 

profits under, 363. 
Complex division of labor, definition 

of, 102. 
Conciliation, labor disputes settled by, 

319. 
Constitution of the United States, 

guarantees of, 323. 
Consumers' goods, definition of, 100. 
Consumers' surplus, definition of, 50, 

51. 
Consumption, nature of, 19, 20, 29- 



415 



416 



INDEX 



37 ; laws of, 40-51 ; aspects of, 67- 
79 ; habits of, 78. 

Cooperation, effect on profits of, 363- 
366 ; by the government, 378. 

Copyrights, basis of, 183 ; laws re- 
garding, 185. 

Corporation, a form of business or- 
ganization, 90-94. 

Corporation tax, place of, 407. 

Costs of production, variations in, 
115; risk an element in, 384-386. 

Credit, effect of business expansion on, 
275, 276. 

Credit money, forms of, 209. 

Crime, causes of, 31. 

Crises, causes of, 274-277. 

Currency. See Money. 

Cutthroat competition, nature of, 160. 

Deductive reasoning, use of, 16. 

Demand, nature of, 32-34, 54, 55; 
definition of, 33 ; elasticity of, 34-37 ; 
supply and, 147. See Price, Supply. 

Department stores, function of, 176, 
177. 

Diminishing returns, la^w of, 122-128. 

Diminishing utility, law of, 44, 45. 

Direct marketing, nature of, 176-179. 

Discriminations in railroad rates, 159, 
160. 

Distribution, inequalities in, 12 ; na- 
ture of, 23, 24 ; definition of, 283. 

Distribution of wealth, account of, 
283-292. 

Division of labor, extent of, 100-108 ; 
social advantages of, 105; disad- 
vantages of, 105, 106. 

Dollar, weight of gold, 204, 205. 

Economic activity, motives behind, 29- 

32. 
Economic good, definition of, 10. 
Economic law, nature of, 17. 
Economical consumption, nature of, 

69-72. 
Economics, definition of, 4 ; nature 

of, 16-19; art side of, 17; material 

for the study of, 18, 19 ; divisions 

of, 19-24. 



Education, industry and, 8 ; tend- 
encies in, 9; influence of, 299-301, 
358. 

Efficiency, elements in, 9, 102-104; 
consumption and, 68, 69 ; relation 
of wages to, 303-306. 

Eight-hour day, advantages of, 315. 

Elastic currency, definition of, 215, 
216. 

Elkins Amendment, provisions of, 165. 

Embargo Act, importance of, 86. 

Employees. Sec Labor, Organized la- 
bor. Wages. 

Employers, organization of, 318, 319. 

English industrial revolution, nature 
of, 85, 86. 

Enterpriser, functions of, 100. 

Exchange, nature of, 22. 

Expenditures, nature of governmental, 
397-401. 

Extensive cultivation, nature of, 124- 
126. 

Falling prices, effects of, 276, 277. 
Family budgets, study of, 287. 
Federal Reserve Bank Law, provisions 

of, 236, 237. 
Federal Reserve notes, nature of, 222, 

223. 
Federal Trade Commission, establish- 
ment of, 190. 
Fertility, a factor in rent, 334. 
First United States Bank, account of, 

216, 217, 233, 234. 
Fisheries, extent and importance of, 

120-122. 
Fixed capital, definition of, 134, 135. 
Forests, extent and character of, 118. 
Form utility, definition of, 20. 
Free good, definition of, 10. 
Free land, effect on distribution of, 283, 

284. 
Free silver, agitation for, 221, 222. 
Free trade, basis of, 262, 263. See 

Protective tariff. 
Futures, the buying of, 360, 361. 

General property tax, nature of, 404, 
405. 



INDEX 



417 



Germany, social insurance in, 386-388. 
Gold, not a free capital good, 137 ; 

price of, 205 ; characteristics of, 201, 

202 ; market and mint values of, 

213, 214; world production of, 217 ; 

production in California of, 120, 

218. 
Gold certificate, nature of, 208. See 

Representative money. 
Gold points, definition of, 248. 
Gold reserves, functions of, 209. 
Gold standard, adoption of, 222. 
Gold supply, automatic checks on, 252. 
Good, definition of, 9. See Free good. 

Economic good. 
Government expenditures, effect of 

price fluctuations on, 271, 272. 
Government operation of industry, 

problems of, 378, 379. 
Government paper money. See 

United States notes. 
Government regulation, influence on 

price of, 149, 150; railroads under, 

162-165 ; a substitute for socialism, 

377-379. 
Great Britain, social insurance in, 388, 

389. 
Greenbacks. See United States notes. 
Gresham's law, explanation of, 215. 

Hamilton, Alexander, reports on bank- 
ing, 234 ; on the tariff, 263. 

Heredity, influence of, 358. 

Home-owning, in the United States, 
290. 

Honesty, an element in efficiency, 
103. 

Hours of labor, lessening of, 105. 

Human motives, examination of, 374, 
375. 

Imagination, a factor in success, 357. 

Immigration, different aspects of, 5; 
problems of, 323-326. 

Incidence of taxation, definition of, 
404. 

Income, education and, 8 ; distribu- 
tion of, 285-287; influence of edu- 
cation on, 299-301. 



Income tax, federal and state laws on, 

406. 
Index numbers, principle of, 273, 274. 
Indians, medium of exchange among, 

199. 
Indirect marketing, basis of, 173, 174; 

wastes in, 175, 176. 
Indirect production, advantages of , 132. 
Individual capital, nature of, 137, 138. 
Individual, society and the, 6. 
Inductive reasoning, use of, 16. 
Industrial efficiency. See Efficiency. 
Industrial Workers of the World, pro- 
gram of, 313. 
Industry, individual viewpoint of, 6 ; 

social viewpoint of, 7 ; education 

and, 8 ; organization of, 85-94 ; 

diversification of, 108 ; place of 

capital in, 133; effect of price level 

on, 274-277. 
Inefficiency, causes of, 289-291. 
Inheritance tax, characteristics of, 406, 

407. 
Initiative, a factor in success, 357. 
Insurance. See Social insurance. 
Intensive cultivation, nature of, 124r- 

126. 
Interest, discussion of, 345-353. 
Interest rate, method of fixing, 349, 

350; variation in, 351-353. 
Inter-regional trade, in the United 

States, 241-243. 
Interstate Commerce Act, provisions 

of, 163-165. 
Investing, nature of, 131. 
Investment bank, nature of, 230. 
Investments, growth of, 75 ; made 

liquid, 94. 
Iron ore, production of, 120. 

Joint costs, principle of, 161. 

Knights of Labor, sketch of, 311, 312. 

Labor, a factor of production, 97. See 
American Federation of Labor, Or- 
ganized labor. Wages. 

Labor legislation, need for, 321-324; 
character of, 323. 



418 



INDEX 



Labor problems, nature and account 
of, 311-324. 

Laissez faire, the doctrine of; 141-143. 
.See Mercantilism. 

Land, importance in human welfare 
of, 11, 12; a factor of production, 
97, 114-128. 

Land values, relation of economic rent 
to, 339. 

Large-scale production, advantages of, 
108-110. 

Law, definition of, 4. 

Law of monopoly price, explanation 
of, 145-147. 

Laws of economics, application of, 17, 
18. See Economic law. Consump- 
tion, Diminishing returns, Diminish- 
ing utility, Marginal utility. 

Lender, viewpoint of, 348-349. 

Location, a factor in production, 117, 
334. 

Lumber, production of, 118. 

Luxuries, nature of, 30, 31. 

Mail-order houses, functions of, 177, 

178. 
Malproduction, definition of, 275, 276. 
Mann-Elkins Amendment, provisions 

of, 165. 
Manufactures, domestic system in, 85 ; 

developments in, 87 ; location of, 

108. 
Marginal utility, law of, 46-51. 
Market, production for, 169, 170. 
Market price, determination of, 56-63. 

See Price. 
Market ratio. See Gold, Silver. 
Marketing, nature and extent of, 169- 

179. 
Marx, Karl, a socialistic leader, 371. 
Maximum prices, nature of, 56. 
Medium of exchange. .See Money. 
Mercantilism, doctrine of, 141-143. 

See Laissez faire. 
Merchandising. See Retailing. 
Middleman, functions of, 21 ; place 

of, 173. 
Military self-sufficiency, maintenance 

of, 265. 



Minimum prices, nature of, 56. 
Minimum wage, proposals for, 392. 
Mining, varying costs of production in, 

117. 
Mint ratio. .See Gold, Silver. 
Monetary laws, account of, 213-224. 
Money, introduction of, 171 ; uses of, 

199-209 ; kinds of, 223 ; fluctuations 

in the value of, 269-271. 
Monopolistic profits, concealment of, 

150, 151. 
Monopoly, limitations on, 147, 148; 

contrasted with competition, 141- 

151. 
Monopoly price, law of, 145-147. 

National bank law, operation of, 235, 
236. 

National bank notes, issue of, 219. 

Natural resources. .See Land. 

Necessaries, definition of, 30. 

New England, industry in, 108; agri- 
culture in, 117. 

New Zealand, arbitration laws of, 321. 

Noncompeting groups, existence of, 
295-.303. 

No-rent land, definition of, 332-334. 

Obedience, an element in efficiency, 

103. 
Observation, importance of, 18. 
Occupation, the choice of, 302, 303. 
Open shop, definition of, 315. 
Open union, definition of, 315. 
Organized labor, spirit of, 7 ; aims and 

methods of, 313-319. 
Overproduction, definition of, 275, 276. 

Par of exchange, definition of, 248. 

Partnership, advantages of, 89, 90. 

Patent Law of the United States, provi- 
sions of, 183-185; objections to, 186. 

Patents, basis of, 183 ; number of. 184. 

Piece wages, definition of, 306, 307. 

Place utility, definition of, 21. 

Plain living, gospel of, 70, 71. 

Point of diminishing returns, definition 
of, 123. 

Political science, definition of, 3. 



INDEX 



419 



Population, growth of (1800-1910), 
98; in cities (1790-1912), 101, 104. 

"Pork barrel" legislation, nature of, 
378. 

Possession utility, definition of, 21. 

Price, demand and, 33, 34; relation 
of demand and supply to, 54-63 
influence of monopoly on, 145-147 
effect of the flow of gold on, 252 
relation of econoinic rent to, 338, 339. 

Price-fixing, difficulties of, 192, 193. 

Price fluctuations, influence on demand 
of, 34-37 ; guarding against, 269- 
277, 359-361. 

Private property, institution of, 375- 
377. 

Production, nature of, 20-22; factors 
of, 97-100; varying costs in, 115- 
117, 359-363. 

Profits, discussion of, 356-366. 

Profit-sharing, nature and definition 
of, 307, 308. 

Promissory note, form of, 232. 

Protective tariff, discussion of, 256-265. 

Public utilities, regulation of, 190-192. 

Quantity theory of money, explana- 
tion of, 216. 

Railroads, developments in, 87; con- 
solidation of, 109 ; building of, 156- 
158; mileage of, 157; competition 
among, 158-161 ; taken over by the 
government, 374. See Rates. 

Rates, making of railroad, 161, 162. 

Rates of exchanges, fluctuations in, 
248, 249. 

Rent, discussion of, 330-341. 

Replacement fund, nature of, 135, 136, 
384-386. 

Representative money, forms of, 206- 
208. 

Resumption of specie payments, ac- 
count of, 208, 209, 219, 220. 

Retailer, place of, 172, 173. 

Retailing, function of, 21 ; successful 
cooperation in, 365-366. 

Revenues, ' sources of governmental, 
397-401. 



Risk, relation of interest rate to, 351 ; 
in industry, 382-386. 

Sabotage, definition of, 313. 

Saving, avenues of, 74-78 ; nature of, 

131. 
Savings banks, importance of, 74; 

functions of, 229, 230. 
"Scab" labor, definition of, 316. 
School attendance, in the United 

States, 301. 
Second United States Bank, account 

of, 216, 217, 233, 234. 
Sellers' schedule, nature of, 60. 
Sellers' surplus, nature of, 57. 
Sherman Anti-Trust Act, provisions of, 

189. 
Sherman Silver Purchase Act, provi- 
sions of, 221. 
Shifting of taxation, definition of, 404. 
Short hauls, nature of, 162. 
Silver, market and mint ratios of, 213, 

214; world production of, 214; 

demonetization of, 220-222. 
Silver certificate, nature of, 208. See 

Representative money. 
Silver dollar, weight of, 206. 
Simple division of labor, definition of, 

101. 
Single enterpriser, place of, 88. 
Single tax, discussion of, 335-338. 
Smith, Adam. See Wealth of Nations. 
Social capital, nature of, 137, 138. 
Social insurance, discussion of, 382-393. 
Socialism, discussion of, 369-379. 
Social problems, caused by unequal 

distribution, 287-291; effect of' 

immigration on, 326. 
Social sciences, 'nature and content of, 

3 ; inter-relation of, 5. 
Social unrest, causes of, 71, 72. 
Society, industrial viewpoint of, 3-12 ; 

the individual and, 6. 
Specialized capital, definition of, 136, 

137. 
Speculation, function of, 360, 361. 
Standard of deferred payments. See 

Money. 
Standard of value. See Money. 



420 



INDEX 



Standard Oil Company, organization 
of, 187 ; dissolution of, 189. 

State banking, era of, 235. 

State finances, character of, 398-400. 

Steadiness, an element in efficiency, 103. 

Sterling exchange, definition of, 248- 
250. See Gold points. Par of ex- 
change. 

Stock exchange, functions of, 93, 94, 
219. 

Stocks, kinds of, 92, 93. 

Strike, effectiveness of, 316-319. 

Substitution, nature and extent of, 78, 
79; influence of , on monopoly price, 
148, 149. 

Supply, nature of, 54, 55. See De- 
mand, Price. 

Tariff. See Protective tariff. 

Tariff legislation, account of, 256-261 ; 
basis of, 261, 262. 

Tax, definition of, 400, 401. 

Taxation, nature of, 24; as an equal- 
izer of incomes, 292 ; bases of, 401- 
403 ; justice and expediency in, 403. 

Taxes, discussion of, 397-407. 

Territorial division of labor, principle 
of, 106-108. 

Thrift, importance of, 72-78. 

Time utility, definition of, 21. 

Time wages, definition of, 306, 307. 

Trade. See Commerce. 

Trade acceptances, nature of, 244, 245. 

Trade debts, payment of, 243-247. 

Trade-marks, basis of, 183; laws re- 
garding, 185, 186. 

Transportation, function of, 21 ; de- 
velopments in, 87, 154-158. 

Trusts, characteristics of, 109 ; his- 
tory of, 186-188; opposition to, 
188, 189; regulation of, 189, 190. 

Unearned increment, definition of, 
335-338. 



Unemployment, risks of, 382, 389 ; 
socialistic attitude toward, 370. 

Union. See Organized labor, Amer- 
ican Federation of Labor, Closed 
shop. Closed union. Wages. 

United States notes (greenbacks), 
issue of, 218, 219. 

Urban land, application of the law of 
diminishing returns to, 127, 128. 

Urban rents, nature of, 334-338. 

Utility, definition of, 20-22. See 
Diminishing utility. Marginal utility. 

Utopian socialism, leaders of, 371. 

Value, relations of money to, 199, 200. 
See Consumption, D3mand, Supply. 
Variety stores, business of, 178, 179. 

Wage-earners, number in the United 
States, 298. 

Wages, nature and character of, 295- 
308. See Labor, American Federa- 
tion of Labor, Organized labor. 

Wagon roads, influence of, 155. 

Wants, nature of, 32, 33 ; variation in 
the intensity of, 40 ; limitations on, 
41, 42; relation of social progress 
to, 42-44. 

Waste, sin of, 72; reasons for, 118, 
144, 145. 

Water power, place in industry of, 120. 

Waterways, influence of, 154, 155. 

Wealth, welfare and, 9-12; nature of, 
10, 11; distribution of, 12, 285- 
287 ; confers power on its posses- 
sor, 31, 32. 

Wealth of Nations, influence of, 141 ; 
extract from, 142. 

Welfare, wealth and, 9-12. 

Wheat, fixed price of, 192, 193. 

Wholesaler. See Middleman. 

Women, in industry, 305, 306. 

Workmen's compensation laws, extent 
of, 390, 391. 



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